SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 1-8403
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ENERGY CONVERSION DEVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-1749884
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1675 West Maple Road, Troy, Michigan 48084
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (248) 280-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Warrants to Purchase Common Stock
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x].
The aggregate market value of stock held by non-affiliates (based upon the
closing price of such stock on the NASDAQ National Market System on September
24, 1999) was approximately $138 million. As of September 24, 1999, there were
219,913 shares of the Company's Class A Common Stock, 430,000 shares of the
Company's Class B Common Stock and 12,734,498 shares of the Company's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1: Business
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OVERVIEW
Energy Conversion Devices, Inc. (the "Company") is a leader in the
synthesis of new materials and the development of advanced production technology
and innovative products. The Company was founded by Stanford R. Ovshinsky and
Iris M. Ovshinsky. Under the direction of Stanford R. Ovshinsky, principal
inventor, the Company has pioneered the development of products and production
technology based on amorphous and related materials, with an emphasis on
alternative energy and advanced information technologies. Unlike the simple,
ordered, three-dimensional arrays found in most crystalline materials, the
Company's proprietary synthetic materials--Ovonic materials--are designed to
exploit unique properties that result from engineered chemical and structural
disorder. Ovonic materials make possible the development and commercialization
of new products with unique chemical, electrical, mechanical and optical
properties and superior performance characteristics.
To advance its technology, the Company has used an integrated systems
approach to inventing materials, products and production technology that
minimizes the customary barriers between research and development, production
design and product planning. The Company's strategy has been to develop products
that have fundamental technological advantages over available alternatives and
that are capable of being produced commercially on an economically competitive
basis. The Company is also continuing its development efforts, funded in part
through contracts with U.S. Government agencies, the Company's licensees and
industrial partners, to broaden and build upon its product and technological
base.
The Company has established a multi-disciplinary business, scientific and
technical organization to commercialize products based on its technologies. It
has developed the enabling proprietary core technologies in the important fields
of energy storage (nickel metal hydride ("NiMH") batteries and hydrogen storage
materials and devices); energy generation (thin-film, flexible, low-cost
photovoltaic (solar) products); and information storage and retrieval
(phase-change rewritable optical memory technology used in removable, rewritable
compact disks ("CD-RW") and high-storage-capacity rewritable digital versatile
disks ("DVDs") and Ovonic Unified Memory ("OUM") which are new micro-
electronic, nonvolatile, thin-film semiconductor devices used to store
information in small areas having a unique combination of low currents, high
density, long life and high speed read and write capabilities).
The Company is currently engaged in manufacturing and selling its
proprietary products on its own, through its joint venture companies as well as
through licensing arrangements with major companies throughout the world. In
addition, in support of these activities, the Company is engaged in research and
development as well as in designing and building production machinery. The
Company has recognized the need to protect its technology and maintains an
extensive patent portfolio consisting currently of 367 issued
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United States patents and 884 foreign counterparts. The patent portfolio
includes numerous basic and fundamental patents covering amorphous, disordered
and related materials as well as patents covering products and production
technologies.
The Company conducts its battery business through its approximately 91%-
owned subsidiary, Ovonic Battery Company, Inc. ("Ovonic Battery"). Sanyo
Electric Co., Ltd. ("Sanyo"), Honda Motor Company, Ltd. ("Honda") and Sanoh
Industrial Co., Ltd. ("Sanoh") own approximately 9% of the outstanding stock of
Ovonic Battery. Sanoh, Honda and Sanyo acquired their interest in Ovonic
Battery in 1993, 1996 and 1998, respectively.
In July 1999, the Company and Shell Hydrogen, a unit of Royal Dutch Shell
Group, entered into a memorandum of understanding to explore the establishment
of a joint venture which would further develop and commercialize the Company's
proprietary solid hydride storage technology.
The Company has two significant joint ventures in the field of alternative
energy, GM Ovonic L.L.C. ("GM Ovonic") and United Solar Systems Corp. ("United
Solar"). GM Ovonic was established to manufacture and commercialize Ovonic NiMH
rechargeable batteries for electric vehicle ("EV"), hybrid electric vehicle
("HEV") and fuel cell electric vehicle ("FCEV") applications. Ovonic Battery
owns a 40% equity interest in GM Ovonic and General Motors Corporation ("General
Motors") owns a 60% equity interest. All significant manufacturers of consumer
NiMH batteries are manufacturing products under license from the Company. NiMH
batteries have become the battery of choice in consumer electronics, in the
automotive industry worldwide for EVs and HEVs and in all applications where
high-density energy storage is required.
The Company and Canon Inc. of Japan ("Canon") each own a 49.98% equity
interest in United Solar, a joint venture formed for the continued development,
manufacture and sale of photovoltaic (solar energy) products under license from
the Company. Through United Solar, the Company has been producing unique solar
shingles and standing seam roofing products that are gaining in popularity as
well as other photovoltaic products which have been described as a major
breakthrough by the U.S. Government. United Solar's products are also easily
modified for use in commercial communication satellite constellations offering a
low-cost, lightweight alternative to traditional space-grade solar cells.
In the field of information technology, the Company's Ovonic phase-change
rewritable optical memory technology, already being used in CD-RW systems, has
been chosen for use in the emerging DVD rewritable optical disk systems. The
international standards for rewritable DVD media and systems, designed by major
optical disk manufacturers, specify the use of the Company's phase-change
optical memory technology. All significant manufacturers of phase-change optical
memory storage media are licensees of the Company, and include Matsushita
Electric Industrial Co., Ltd. ("Matsushita/Panasonic"), Ricoh Company Limited
("Ricoh"), Sony Corporation ("Sony"), Toshiba Corporation ("Toshiba"), Asahi
Chemical Industry Co., Ltd. ("Asahi"), Hitachi, Ltd.
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("Hitachi"), Plasmon Limited ("Plasmon"), Toray Industries, Inc. ("Toray"), TDK
Corporation ("TDK"), and Teijin, Limited ("Teijin").
In January 1999, the Company and Mr. Tyler Lowrey, a recognized authority
in semiconductor memory technology and the former vice chairman and chief
technology officer of Micron Technology, Inc., formed a joint venture, Ovonyx,
Inc., to commercialize the Company's Ovonic Unified Memory. Based on the
Company's proprietary phase-change materials, OUM can have a wide variety of
computer applications and is intended to replace conventional DRAM, SRAM and
Flash EEPROM semiconductor memory devices.
The Company has entered into a variety of other global strategic alliances
and license agreements for the commercialization of its technologies such as the
August 1999 agreement (subject to approvals by the Governments of the United
States and China and the finalization of financing arrangements) confirming the
cooperation between Rare Earth High-Tech Co, Ltd. of Baotou Steel Company, Inner
Mongolia, China, and Ovonic Battery for licensing joint ventures and the
licensing of advanced NiMH battery technology.
Certain technical terms used herein are defined in the section captioned
"Glossary of Technical Terms" appearing at the end of this Item 1.
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MAJOR BUSINESSES
The Company's business strategy has been to develop and commercialize
enabling technologies for use in the fields of alternative energy and
information technologies. This strategy has produced inventions of unique,
proprietary and cost-effective products and production processes which the
Company then leverages through strategic commercial alliances with major
companies worldwide.
Energy activities, specifically in the areas of energy storage and
photovoltaic systems, represent a major element of the Company's business
strategy. Environmentally-safe methods of generating and storing energy have
become critical in today's world. The Company's battery, hydrogen storage
materials and devices, and photovoltaic technologies have gained worldwide
recognition, particularly in light of sustained concerns about air pollution,
global climate change, ozone layer depletion, dependence on imported oil and
related concerns which may cause international political and economic
instability.
Energy Storage.
Rechargeable Batteries. The Company's Ovonic Battery subsidiary has
developed the proprietary NiMH battery technology using Ovonic materials which
has achieved recognition by major battery manufacturers throughout the world.
The Company believes that all commercial NiMH batteries in use are covered by
the Company's basic patents. Ovonic Battery currently has over a dozen consumer
battery licensees and has established a dominant patent position in the field of
Ovonic NiMH batteries, with 56 issued United States patents and 257 foreign
counterparts. Additional United States and foreign patent applications are in
various stages of preparation and prosecution.
Ovonic NiMH batteries are being manufactured and sold throughout the world
by major international companies under licensing and joint venture arrangements
with the Company. Ovonic Battery is also in production of the NiMH battery
electrodes and positive electrode materials for sale to its licensees and its GM
Ovonic joint venture.
Ovonic NiMH batteries store over twice as much energy as standard nickel
cadmium ("Ni-Cd") or lead acid batteries of equivalent weight. In addition,
Ovonic NiMH batteries have high power, long cycle life, are maintenance free and
have no memory effect. Moreover, Ovonic NiMH batteries do not contain cadmium or
lead, both environmentally hazardous substances. Ovonic NiMH batteries are made
in a wide range of sizes and have a wide range of applications, including
hand-held consumer electronics, EVs, HEVs and FCEVs, including electric two- and
three-wheeled vehicles, power tools, utility applications and industrial
batteries.
During the fiscal year ended June 30, 1999, Ovonic Battery produced
negative electrodes and positive electrode materials for sale to certain
licensees for assembly into complete batteries for consumer, EV, HEV and FCEV
applications. Ovonic Battery also has produced batteries for EV and HEV
applications engineered and designed for volume production. The Ovonic NiMH
battery, by virtue of its engineered materials, possesses
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superior performance characteristics without the limitations of conventional
batteries. Ovonic Battery continues to further improve the performance
characteristics of its Ovonic NiMH batteries.
In October 1997, Ovonic Battery was awarded a contract by the U.S.
Department of Commerce through its National Institute of Standards and
Technology Advanced Technology Program ("ATP"). Ovonic Battery, along with
several industry partners, has as its objective the development of the next
generation of high energy density NiMH batteries using low-cost magnesium-based
hydrogen storage materials and novel production technologies under this
three-year, multi-million dollar cost-sharing program.
Ovonic Battery is currently focusing on three principal battery markets:
rechargeable batteries for portable electronics and consumer applications; EV,
HEV and FCEV propulsion batteries; and batteries for the propulsion of two- and
three-wheeled vehicles. These batteries can also serve industrial applications
such as portable power tools, energy storage for remote power generation and
battery-operated industrial equipment. The Company is also exploring the next
generation starter, lighting and ignition (SLI) batteries in conventional
automotive applications which will require batteries with high performance at
higher voltages.
Rechargeable Portable Electronics, Power Tools and Consumer Batteries. The
need for high energy density rechargeable batteries has continued to grow in
recent years. Increasing consumer dependence on portable electronic
products--such as cellular telephones, portable computers and cordless
tools--has created a large market for rechargeable batteries and has fueled
development of higher energy density battery systems. Although conventional
storage batteries, such as Ni-Cd, have been further improved in design and
packaging in recent years, the demand for higher performance batteries continues
to increase. At present, conventional Ni-Cd batteries have an energy density of
30-35 watt-hours/kilogram. Ovonic NiMH batteries are capable of having an energy
density of over 90 watt-hours/kilogram. Technology improvements have led to a
demonstration of energy density in excess of 100 watt-hours/kilogram in
prototype batteries with even higher energy densities in the process of
development.
Ovonic NiMH batteries offer a convenient "drop in" replacement for Ni-Cd
batteries in portable electronic and household appliances. Consumer and
governmental awareness that cadmium contained in Ni-Cd batteries can cause
serious health problems has begun to move the industry away from Ni-Cd
batteries. The desire of the battery industry to be cadmium-free is also a major
factor in the growing interest in Ovonic NiMH batteries.
Ovonic Battery has licensing arrangements with many of the world's largest
battery manufacturing companies. Ovonic Battery's proprietary battery
technology has been licensed for consumer battery applications to GP Batteries
International Limited ("GP Batteries") (formerly Sylva Industries, Ltd.) in Hong
Kong, one of the world's largest manufacturers of 9-volt batteries and button
cells; Varta Batterie AG ("Varta"), Europe's largest battery company; Sovlux Co.
Ltd. ("Sovlux"), the Company's joint venture in Russia; Harding Energy Inc.
("Harding"); Eveready Battery Company, Inc. ("Eveready") (formerly
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Gates Energy Products, Inc.), the largest United States rechargeable consumer
battery company; Walsin Technology Corporation ("Walsin") and Nan Ya Plastics
Corporation ("Nan Ya") (an affiliate of Formosa Plastics Group and the assignee
of Asia Pacific Investment Co.), both leading Taiwanese companies; Samsung
Electronics Co., Ltd. ("Samsung") and LG Chemical, Ltd. ("LG Chen"), leading
Korean companies; Sanyo, Canon, Hitachi Maxell, Ltd. ("Hitachi Maxell"),
Furukawa Battery Co., Ltd. ("Furukawa") and Matsushita Battery Industrial Co.,
Ltd. ("MBI"), all leading Japanese companies. In addition, the Ovonic battery
technology is being used in consumer battery applications by two major consumer
battery manufacturers based in Japan. Saft, S.A., Saft America, Inc., GS-Saft
Ltd. ("Saft Group") and Japan Storage Battery Co., Ltd. are also licensed under
a royalty-bearing license agreement to Ovonic Battery's proprietary battery
technology in the United States.
Electric, Hybrid and Fuel Cell Electric Vehicle Batteries. The strategic
importance of EVs, HEVs and FCEVs both in the United States and worldwide has
increased greatly in recent years. This heightened interest is due to many
concerns such as air pollution, global climate change, ozone layer depletion and
dependence on imported oil.
Most of the world's major automobile manufacturers have active programs
underway to develop and commercially market EVs, HEVs and FCEVs. General Motors
introduced the EV1, the first modern limited-production car designed from the
ground up to be an electric vehicle, in the Fall of 1996 at Saturn dealerships
in the Los Angeles and San Diego, California, and Phoenix and Tucson, Arizona,
areas. General Motors announced that Ovonic NiMH batteries manufactured by GM
Ovonic became available in limited quantities in the Chevrolet S-10 electric
pickup truck in late 1997 and will be available in the EV1 during 1999. Since
Ovonic NiMH battery technology provides two to two-and-a-half times the driving
range as the same mass of lead acid batteries, the NiMH battery has become the
battery of choice for several major automobile manufacturers as they prepare to
commercialize and market EVs, HEVs and FCEVs.
In May 1999, the U.S. Department of Energy ("DOE") released the results of
baseline performance testing of the EV1 and the Chevrolet S-10 electric pickup
truck powered by Ovonic NiMH batteries manufactured by GM Ovonic. According to
the DOE results, the EV1 with Ovonic NiMH batteries is the first vehicle to have
a range of 220.7 miles at a constant speed of 45 miles-per-hour (mph) and 160.6
miles at a constant speed of 60 mph. In addition, the S-10 electric pickup truck
with Ovonic NiMH batteries traveled 130.6 miles at a constant speed of 45 mph
and 87.7 miles at a constant speed of 60 mph, twice as far as the lead acid
battery-powered S-10 previously tested. The baseline performance testing was
conducted by the DOE's Field Operations Program at the Idaho National
Engineering and Environmental Laboratory.
EVs powered by Ovonic NiMH batteries took first and second place in the
overall competition (including acceleration, handling and consumer acceptability
as well as range and energy efficiency) at the 1999 Tour de Sol Road Rally. This
also was the sixth
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consecutive year that Ovonic batteries have powered electric vehicles beyond the
200-mile threshold.
To illustrate the lower cost operation of battery-powered electric
vehicles, a four-door Chevrolet Geo Metro with a gasoline engine was matched
against a Solectria Force (the electric version of the Geo Metro) to measure the
operating efficiencies of the two vehicles over a 23.5-mile route through
mid-town Manhattan (New York City) at the 1998 Tour de Sol. Based upon a central
power plant efficiency rate of 51%, a power transmission efficiency rate of 92%,
a battery charger efficiency rate of 90% and a battery energy efficiency rate of
90%, the electric car's use of 2.87 kWh of electricity was the equivalent of
0.27 gallons of gasoline. The gasoline-fueled car used 2.28 gallons of gasoline.
The gasoline Geo Metro achieved 10.3 miles per gallon, while the Solectria Force
returned an 87 miles-per-gallon equivalent. At $1.00 per gallon, it cost $2.28
for the Geo Metro's gasoline and the equivalent of $.27 to power the Solectria.
GM Ovonic. In June 1994, Ovonic Battery and General Motors formed a joint
venture, GM Ovonic, to manufacture and sell Ovonic Battery's proprietary NiMH
batteries for four-wheeled electric propulsion applications to vehicle
manufacturers on a worldwide basis. GM Ovonic is owned 40% by Ovonic Battery and
60% by General Motors. Ovonic Battery has contributed intellectual property,
licenses, production processes, know-how, personnel and engineering services
pertaining to Ovonic NiMH battery technology to the joint venture. General
Motors' contribution consists of operating capital, plant, equipment and
management personnel necessary for the production of batteries.
GM Ovonic is engaged in manufacturing of NiMH batteries at its facility in
Troy, Michigan, and its wholly-owned subsidiary, Ovonic Energy Products, Inc.,
has opened a plant in Kettering (Dayton), Ohio, approximately 10 times larger
than its Troy plant, for the production of advanced NiMH batteries. GM Ovonic is
producing NiMH batteries for EVs and is making the batteries available to
vehicle manufacturers, including General Motors, for use in their advanced
technology vehicles.
Unique Mobility Europa, GmbH. In May 1999, the Company, EV Global Motors
Company ("EV Global"), founded by Lee Iacocca, and Unique Mobility, Inc.
("Unique Mobility"), a leader in the development and manufacture of highly
efficient, power dense, permanent motors and controls primarily for application
in EVs and HEVs, announced the formation of a joint venture, Unique Mobility
Europa, GmbH ("Unique Europa"), to manufacture and sell EVs, HEVs and FCEVs for
world markets. Unique Europa, a limited liability company, is headquartered in
Mittweida, near Leipzig, in the Free State of Saxony, Germany. Its first product
will be an all new, purpose-built minivan using an innovative composite body
structure and an advanced battery powered electric drivetrain designed to serve
urban transportation requirements where urban pollution concerns have restricted
the use of conventional vehicles. Configured as either a 2-passenger cargo van
or a 6-passenger commuter van, the vehicle will be powered by Ovonic NiMH
batteries and Unique Mobility's integrated permanent magnet traction drive.
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Other Vehicle Propulsion Battery Business Arrangements. In addition to its
GM Ovonic joint venture, Ovonic Battery has entered into royalty-bearing license
agreements for the manufacture of vehicle propulsion batteries and related
products outside of the United States with Sanyo, Hyundai Motor Company
("Hyundai"), Varta, Nan Ya, GP Batteries and Sovlux Battery. Sanyo, Hyundai, GP
Batteries and Sovlux Battery have restricted rights to sell vehicle propulsion
batteries in North America. Varta's license includes the right to manufacture
vehicle propulsion batteries subject to certain limitations on access to
technology and restrictions on manufacturing in North America. Saft Group is
licensed under a royalty-bearing license agreement for the manufacture and sale
of vehicle propulsion batteries in the United States.
Ovonic Battery is responding to significant interest by bus manufacturers
seeking to comply with government initiatives for providing pollution-free mass
transportation in urban areas.
Ovonic Battery has developed a "Family of Batteries" that can satisfy the
energy storage needs of the full spectrum of EVs, HEVs and FCEVs, including
bicycles, two- and three-wheeled scooters, cars, trucks and vans. This
Company-sponsored development was based on the demonstrated ability of NiMH
batteries to be engineered for different energy and power densities in a wide
range of capacities. The automotive industry has expressed considerable interest
in batteries for the emerging HEV market and Ovonic Battery is positioning
itself to offer the industry a high power, durable, high charge/discharge rate
NiMH battery. Ovonic Battery has demonstrated the power capabilities of its
battery at 1000 watts per kilogram for HEV applications. Ovonic NiMH batteries
for HEVs are being reviewed with a variety of potential customers. This "Family
of Batteries" led to a nearly-completed Ovonic Battery production development
program, which is intended to provide next- and future-generation NiMH batteries
that will be manufactured by GM Ovonic. Both EV and HEV types of NiMH batteries
are included in the program with the objective of increasing the energy density
of future batteries as well as reducing their size and cost.
Ovonic Battery's HEV battery, developed under its "Family of Batteries"
program, meets specifications set by the Partnership for Next Generation of
Vehicles, a program among Chrysler Corporation ("Chrysler"), Ford Motor Company
("Ford"), General Motors and the U.S. Department of Commerce. Ovonic NiMH
batteries tested for HEVs have the following present performance
characteristics:
Specific Energy: 70 watt-hours/kg.
Peak Power: 625 watts/kg.
Regenerative Power: 600 watts/kg.
Two- and Three-Wheeled Vehicles. Ovonic Battery has installed Ovonic NiMH
batteries in scooters converted to electric power and successfully demonstrated
the application of its battery for two- and three-wheeled electric vehicles.
Ovonic Battery considers two- and three-wheeled electric vehicles and
power-assisted bicycles a potential
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large-volume market since these types of vehicles are the primary mode of
transportation in many European and developing countries throughout the world,
such as India, China and Taiwan. Electric two- and three-wheeled vehicles using
Ovonic NiMH batteries should improve the acute air pollution problems in these
regions caused by conventional two- and three-wheeled vehicles.
The Company has entered into royalty-bearing license agreements for the
manufacture and sale of Ovonic NiMH batteries for two- and three-wheeled
vehicles with Sanyo, Walsin, Sanoh and Nan Ya.
Sanoh, a licensee in Japan, has expanded its production of NiMH batteries
for two-wheeled electric vehicle applications at its plant in Koga, Japan.
Among Sanoh's customers are large manufacturers of electric scooters and
bicycles such as Honda who has announced plans to introduce new products.
In February 1998, EV Global Motors and the Company announced a strategic
alliance to cooperate in further development and commercialization of
light-power-assist EVs using EV Global vehicles and the Company's energy storage
technologies. In forming this strategic alliance, the Company and EV Global
exchanged shares of their Common Stock. EV Global also transferred to the
Company certain shares of the Common Stock of Unique Mobility held by EV Global,
which in May 1999 were exchanged for shares of Unique Europa.
Sovlux Battery. In March 1998, the Company announced the formation of
Sovlux Battery, an affiliate of Sovlux, the Company's U.S.-Russian joint
venture, owned 50% by the Company and 50% by the Chepetsky Mechanical Plant
("Chepetsky") in Glazov, Udmurt Republic. Sovlux Battery plans to produce NiMH
battery materials and components for sale to Ovonic Battery and its licensees.
In the longer term, Sovlux Battery expects to manufacture batteries for the
emerging two- and three-wheeled electric vehicle market in Europe and Asia and
for four-wheeled electric vehicles in Russia.
The availability of abundant Russian raw materials for the battery,
Chepetsky's alloy processing and production expertise, and joint collaboration
on battery research and development could provide the potential for substantial
reductions in the cost of Ovonic Battery's proprietary NiMH batteries.
Other Battery Applications. Several licensees of Ovonic NiMH battery
technology, such as Sovlux, Canon and GM Ovonic, have been granted rights to
manufacture and sell large batteries for energy storage applications for
electricity generated by photovoltaics, remote power generation, utility
applications and battery-operated industrial equipment. There are numerous other
applications for Ovonic NiMH batteries where portable energy storage is required
or convenient.
Hydrogen Storage Materials and Devices. In July 1999, the Company and
Shell Hydrogen, a unit of Royal Dutch Shell Group, entered into a memorandum of
understanding to explore the establishment of a joint venture which would
further develop and commercialize the Company's proprietary solid hydride
storage technology. The
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Company has made a long-term investment in the development of engineered
materials that can be used to store hydrogen as a solid. These proprietary
hydride materials safely store hydrogen that can be released for use as a fuel
for conventional internal combustion engines, or as a clean source of onboard
hydrogen for vehicles powered by electricity generated by onboard fuel cells.
The Company is conducting various research programs sponsored by U.S.
Government agencies to continue the Company's earlier work on the development of
high-performance materials for the storage of hydrogen, the design of prototype
metal hydride hydrogen storage devices, and the development of integrated
renewable hydrogen-generation storage systems. The prototype hydrogen storage
devices utilize the Company's proprietary high-performance metal hydride
materials and are designed to work with applications such as hydrogen-oxygen
fuel cells as well as other applications. These storage devices offer a safe,
low pressure, high density alternative to gaseous or liquid hydrogen storage for
a variety of transportation, stationary or portable power applications.
Under a DOE-sponsored program, the Company is developing an integrated
renewable hydrogen-generation storage system. This system uses water
electrolysis to convert the electricity produced by the Company's multi-junction
photovoltaic products to hydrogen and stores the produced hydrogen in metal
hydride hydrogen storage devices. The system is being designed for residential
or small-scale commercial production of hydrogen which can be used to replace
conventional fuels as sources of energy conversion.
Energy Generation.
Photovoltaic Technology. Photovoltaic ("PV") systems provide a clean and
simple solid-state method for direct conversion of sunlight into electrical
energy. The major barrier to the widespread use of direct solar-to-electrical
energy conversion has been the lack of an inexpensive solar cell technology. The
Company and its joint venture, United Solar, are leaders in thin-film amorphous
photovoltaic technology. The Company has invented a unique proprietary approach
to the manufacture of photovoltaic products. Compared to PV products that are
produced by other PV technologies, the ECD/United Solar PV products are
substantially lighter, more rugged, require much less energy to produce and can
be produced in high volume at significantly lower cost. In large volume (100 MW)
production, ECD/United Solar's PV products can become price competitive to
conventional fuels. The Company's proprietary position in photovoltaics ranges
from the invention of materials and the development of products to the design
and manufacture of production equipment. The Company and United Solar have more
than 165 U.S. patents and numerous foreign counterpart patents in the area of
photovoltaic technology.
Crystalline silicon was the original materials technology used by the
photovoltaic industry. First widely used in space satellites, conventional
crystalline silicon solar cells are fabricated in a step-and-repeat, batch
process from small wafers of single crystal or polycrystalline silicon
semiconductor materials. Notwithstanding the substantial advances that have been
made in the development of this technology, the cost of crystalline photovoltaic
modules still is high because of high materials costs and because many
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processing steps are needed to manufacture the modules. Crystalline silicon
solar cell modules also are bulky and break easily.
The Company has developed proprietary technology to reduce the materials
cost in a solar cell using the Company's proprietary thin-film, vapor-deposited
amorphous silicon ("a-Si") alloy materials. Because a-Si absorbs light more
efficiently than its crystalline counterpart, the a-Si solar cell thickness can
be 100 times less, thereby significantly reducing materials cost. By utilizing a
flexible, stainless steel substrate and polymer-based encapsulants, United
Solar's PV products can be very lightweight, flexible, abuse-tolerant and
particularly easy to transport to remote rural areas and install without
breakage.
Amorphous cells with different light absorption properties also can be
deposited one on top of another to capture the broad solar spectrum more
effectively, which increases the energy conversion efficiency of the multi-cell
device and improves performance stability. This unique "triple-junction"
approach has resulted in world record efficiencies for the a-Si technology. In
August 1998, United Solar was awarded an "R&D 100" award by R&D Magazine for its
triple-junction amorphous silicon solar electric module. The magazine's editors
and staff, together with outside experts, reviewed thousands of new inventions
to determine the 100 most significant advances of 1998.
The Company and its United Solar joint venture hold current world records
for both large- and small-area conversion efficiency for amorphous silicon solar
cells, as measured by the DOE's National Renewable Energy Laboratory ("NREL").
Conversion efficiency is the percentage of sunlight that is converted into
electricity. United Solar has achieved a world record of 10.2% stabilized energy
conversion efficiency for large area (one-square foot) amorphous silicon alloy
photovoltaic modules, which the DOE characterizes as a major breakthrough.
United Solar holds the world records for amorphous silicon alloy photovoltaic
cells including solar-to-electricity stabilized efficiency of 13% for small-area
amorphous silicon alloy photovoltaic cells.
To further reduce the manufacturing cost of photovoltaic modules, the
Company has pioneered the development of and has the fundamental patents on a
unique approach utilizing proprietary continuous roll-to-roll solar cell
deposition process. Using a roll of flexible stainless steel that is a half-mile
long and 14 inches wide, nine thin-film layers of a-Si alloy are deposited
sequentially in a high yield, automated machine to make a continuous, stacked
three-cell structure. The roll of solar cell material then is processed further
for use in a variety of photovoltaic products. This basic approach that the
Company has pioneered is unique in the industry and has significant
manufacturing cost advantages. The Company believes that in high-volume
production its photovoltaic modules will be significantly less expensive than
conventional crystalline silicon and other thin-film solar modules produced on
glass and can be cost competitive with fossil fuels. The importance of the
Company and United Solar's work in this field has been recognized by the U.S.
Department of Energy.
The Company has formed two joint ventures to manufacture photovoltaic
modules and systems and to sell them throughout the world.
-12-
<PAGE>
In 1990, the Company and Canon formed United Solar for the continued
development, manufacture and sale of Ovonic solar cells under license from the
Company. United Solar is owned 49.98% by the Company and 49.98% by Canon.
United Solar is producing a variety of PV products and selling PV modules
and systems throughout the world. United Solar manufactures products for remote
power applications, telecommunications, PV-powered lighting systems,
building-integrated photovoltaic systems and marine applications at its
facilities in Troy, Michigan.
Based on research and development conducted at the Company in the early
1980s, the Company and United Solar have developed, and United Solar is
manufacturing and selling, unique products for the building industry such as PV
shingles and metal roofing products which emulate conventional roofing materials
in form, construction, function and installation. In 1996, United Solar received
the Popular Science 1996 "Best of What's New" Grand Award and, in 1997, it
received the Discover Magazine 1997 "Technology Innovation Award" for its
flexible solar shingles.
United Solar is also building on the Company's development of ultralight
weight PV technology and developing PV products for space applications. The
global telecommunications revolution is expected to result in the launch of
large constellations of low earth orbit satellites and high altitude platforms
in the next decade which will require lower cost, lighter weight PV modules than
those currently used in space. United Solar's PV cells are radiation hard,
perform very well at the high temperatures encountered in space and can be
significantly lighter than conventional technologies as well as less expensive.
In December 1998, United Solar announced that its ultralight space solar
modules had been successfully installed on the MIR Space Station and are
undergoing performance testing and qualification for a variety of space
applications. United Solar's installation on the MIR marks the first time
advanced thin-film amorphous solar modules have been installed on an orbiting
spacecraft.
In 1990, the Company also formed Sovlux Co., Ltd. ("Sovlux"), a joint
venture with State Research and Production Enterprise Kvant ("Kvant") to
manufacture the Company's photovoltaic products in the countries of the former
Soviet Union. Sovlux is owned 50% by the Company. In 1990, Kvant entered into
machine-building contracts with the Company for the construction of 2MW-capacity
pilot photovoltaic manufacturing equipment. The equipment has been installed in
Sovlux's plant in Moscow. Kvant contributed this equipment to the joint venture
in exchange for its ownership interest in Sovlux.
Sovlux has conducted pre-production activities consisting of manufacturing
plant preparation and machinery optimization. Sovlux has received various U.S.
Government contracts in 1998 and 1999 in connection with certain of its
operations. However, Sovlux has not been able to commence volume production of
photovoltaic products due to current economic conditions in Russia.
-13-
<PAGE>
For more than 12 years, the Company has been engaged in research contracts
awarded by the DOE and NREL aimed at further development of high-efficiency
amorphous silicon-based alloy thin-film solar cells, improvement of photovoltaic
manufacturing technologies, and the development and demonstration of
photovoltaic systems to be used in rooftop construction in lieu of shingles and
other roofing materials.
In June 1998, the Company was awarded a new cost-sharing program by DOE
and NREL to further advance the Company's proprietary roll-to-roll PV
manufacturing technology. This program is part of the DOE's ongoing initiatives
to enhance U.S. leadership in the world PV market through improved PV
manufacturing processes and reduced manufacturing costs.
Another new cost-sharing contract, from DOE's Thin-Film Partnership
Program, was awarded to the Company in August 1998. The overall goal of this
program is to increase the rate at which the highly efficient "triple-junction"
a-Si solar cells are deposited onto the substrate.
Information Technologies.
The Company has developed a number of key proprietary products and
processes in the field of information technology. In the past, products have
been developed by the Company for data input (image scanners), data output
(copier and laser printer drums), data display and data storage (optical and
semiconductor memory devices).
Optical Memory. The Company is the inventor and originator of phase-change
rewritable optical memory disk technology. The Company's Ovonic phase-change
rewritable optical memory technology makes it possible to store, in a
convenient, removable disk format, many times the amount of data as a
conventional floppy magnetic disks, and is a much more robust product having
much lower cost than removable rigid magnetic disks. The Company's proprietary
phase-change rewritable optical memory uses a laser to write or erase digital
data on a thin film of amorphous semiconductor alloy that has been deposited
onto a substrate disk. The disk and data-reading process are similar to an
ordinary CD or CD-ROM, with the significant difference being that the
phase-change rewritable optical memory can be erased and rewritten many times
(1,000 in the case of CD-RW and 500,000 in the case of DVD-RAM).
The Company has licensed its phase-change rewritable optical memory
technology to 13 companies and expects to license others who are developing
phase-change optical memory products. Among the Company's licensees are
Matsushita/Panasonic, Ricoh, Sony, Toshiba, Asahi, Hitachi, Plasmon, Toray, TDK
and Teijin. The license agreements provide for royalty payments to the Company
based upon sales of phase-change rewritable optical memory disks.
A "convergence" of the information processing, communications and
entertainment industries is taking place as a result of advances in digital
electronics. A new and emerging "convergence" product offering higher-capacity
data storage is the DVD. Playback-only DVD disks and drives (DVD-ROM) are
commercially available now. The
-14-
<PAGE>
Company's high-capacity phase-change optical memory technology is well
established as the technology of choice for rewritable DVD media. Rewritable
DVD-RAM media and drives for computer and information technology applications
first became commercially available in the Summer of 1998. Products based on a
second format, DVD+RW, are expected to enter the market in the last quarter of
1999.
The Company's optical memory licensees now producing phase-change optical
media, as well as other storage media manufacturers, are expected to become
manufacturers of rewritable DVD products. Due to their high data storage
capacity, the DVD Forum, comprised of leading manufacturers in the optical disk
industry, is targeting a wide range of computer and information technology
applications for DVD-RAM disks, including digital television recording.
The Company is also involved in two development programs under
cost-sharing contracts awarded by the U.S. Department of Commerce through its
National Institute of Standards and Technology Advanced Technology Program
("ATP") relating to the Company's optical memory technologies. Under one
program, the Company is developing a new manufacturing system for DVD media that
is expected to increase manufacturing throughput and significantly reduce costs.
The other program involves the goal of increasing the storage capacity of
DVD-compatible optical storage technologies by a factor of 10 and significantly
increasing the data transfer rate, making it possible to store two hours, maybe
more, of high-definition television content, or thousands of professional-
quality high-resolution still photos, on a single disk.
Ovonic Unified Memory. The Company, on the basis of its pioneering
technology, developed the first nonvolatile semiconductor memory, the Ovonic
EEPROM, for computer data storage in the 1960s. The Company has advanced and
extended that early work and has developed a proprietary family of
high-performance nonvolatile semiconductor memory and information processing
devices, called Ovonic Unified Memory ("OUM") which the company expects to
commercialize through a joint venture company, Ovonyx, Inc., formed in 1999 with
Mr. Tyler Lowrey, a recognized authority in semiconductor memory technology.
OUM is designed to provide nonvolatile computer data storage with the
speed of current, volatile DRAM semiconductor system memory as well as to
decrease the cost of production. OUM also offers an opportunity to develop new,
fast computer architectures so as to eliminate the use of multiple tiers of
memory as well as data transfer bottlenecks caused by the current computer
memory hierarchy. By removing the distinction between archival storage and
system memory, data can be stored in a nonvolatile fashion and "executed in
place," resulting in improved computer performance and lower costs of data
transfer than those associated with the currently used memory hierarchy. The
Company believes that OUM can, in a single device, replace the multiple memory
types of devices which are used in today's personal computers.
Another application of OUM is intended for use in the rapidly growing
Flash EEPROM market. Flash EEPROMs are used in portable electronic devices such
as laptop computers, pagers, and cellular telephones as all-solid-state,
low-power replacements for
-15-
<PAGE>
magnetic hard disk storage. Still another application of OUM can provide a basis
for practical, highly complex, three-dimensional neural network systems for use
in advanced artificial intelligence and speech- and image-pattern recognition.
Because OUM memory can provide the capability to store more than one bit of
information per memory cell, it can allow the fabrication of semiconductor
memory with high storage density. An application under development is the use of
OUM in electronic cash and smart card systems that require information to be
stored in an encrypted, secure and tamperproof manner.
Thin-Film Synthetic Materials.
The Company has developed a range of vapor-deposited thin-film materials
and cost-effective roll-to-roll production technologies, including a high-rate
microwave plasma-enhanced chemical vapor deposition ("MPCVD") process. Two
major commercial applications for this technology being pursued are
high-performance optical coatings and transparent vapor barrier coatings.
Optical Films. Another important application for transparent thin-film
coatings which are deposited using the Company's cost-effective roll-to-roll
production technologies is in thin-film optical coatings which selectively
absorb, reflect or transmit certain types of electromagnetic radiation. These
coatings have a wide range of commercial applications--from anti-glare screens
for computer and television displays to solar-controlled windows for
architectural and automotive applications. In February 1999, the Company's
Production Technology and Machine Building Division received a contract to build
large-area MPCVD equipment which is expected to provide a platform for
commercialization of the Company's passive coatings technology and related
equipment.
Vapor Barrier Films. The Company's MPCVD process has been applied in the
development of a novel, low-cost, transparent vapor barrier coating for plastic
beverage containers and flexible packaging films. An extremely thin coating
(less than 1 millionth of an inch, or 1/50th of the wavelength of visible light)
of the Company's MPCVD amorphous silicon oxide (quartz glass) improved the
oxygen and water vapor barrier of commodity and rigid packaging films by about a
factor of 100. By blocking oxygen and water vapor transmission, the shelf life
of food beverages, pharmaceuticals and other types of sensitive products is
extended.
PRODUCTION TECHNOLOGY AND MACHINE BUILDING DIVISION
AND CENTRAL ANALYTICAL LABORATORY
The Production Technology and Machine Building Division operates as a
profit center for the Company's machine-building and engineering activities. It
has extensive experience in designing and building proprietary automated
production equipment. The Production Technology and Machine Building Division
has designed and built for the Company and its licensees five generations of
photovoltaic production lines, including United Solar's machinery and equipment
for solar cells capable of producing 5 megawatts of electricity on an annual
basis, as well as research, development and manufacturing equipment for
batteries, vapor barrier coating and other materials technology.
-16-
<PAGE>
The Company's Central Analytical Laboratory conducts analysis of materials
produced by the Company and its joint venture partners and licensees as well as
materials produced by other companies. The Company also maintains an advanced
materials technology group that supports the efforts of each of the Company's
business areas.
RESEARCH AND PRODUCT DEVELOPMENT
The nature of the Company's business has required, and will continue to
require, expenditures for research and product development to support the
commercial activities of the Company. Such funds have been forthcoming from
United States government agencies and the Company's licensees and industrial
partners to partially fund these activities. The materials, production
technologies and products being developed and produced by the Company, Ovonic
Battery and the Company's joint venture partners are technologically
sophisticated and are designed for markets characterized by rapid technological
change and competition based, in large part, upon technological and product
performance advantages.
The following is a summary of the Company's consolidated direct
expenditures, excluding the allocation of patents, depreciation and general and
administrative expenses, for product research and development for the five years
ended June 30, 1999. All of the Company's research and development costs are
expensed as incurred.
<TABLE>
<CAPTION>
Direct Research and Development Expenditures
Year Ended June 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sponsored $14,403,073 $12,464,256 $ 4,996,632 $ 6,732,570 $ 9,154,263
by Licensees,
Government
Agencies and
Industrial Partners
Sponsored by
the Company 8,381,514 8,782,943 11,735,861 6,214,848 2,808,219
------------- ----------- ----------- ----------- -----------
$22,784,587 $21,247,199 $16,732,493 $12,947,418 $11,962,482
=========== =========== =========== =========== ===========
</TABLE>
SOURCES AND AVAILABILITY OF RAW MATERIALS
Materials, parts, supplies and services used in the Company's business are
generally available from a variety of sources. However, interruptions in
production or delivery of these goods and services could have an adverse impact
on the Company's manufacturing operations.
-17-
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
Since its founding in 1960, the Company's research and development efforts
have focused on amorphous, disordered and related materials, a previously
unrecognized field of materials science that has since attracted widespread
attention. The Company has established a multi-disciplinary business, scientific
and technical organization ranging from research and development to
manufacturing and selling products as well as designing and building production
machinery. The Company has recognized the need to protect carefully those
activities. The Company's extensive patent portfolio consists of 367 United
States patents and 884 foreign counterparts. The Company's patent portfolio
includes numerous basic and fundamental patents applicable to each of the lines
of business in which the Company is engaged. The Company invents not only
materials, but also develops low-cost production technologies and
high-performance products. The Company's patents, therefore, cover not only
materials, but also the production technology and products developed by the
Company.
The Company believes that worldwide patent protection is important for it
to compete effectively in the marketplace. Certain of the Company's patents have
been the subject of legal actions, two of which have been resolved favorably to
the Company prior to trial. Because the validity of the Company's patents has
not to date been confirmed through legal proceedings, no assurance can be given
as to either the validity or scope of the Company's patent protection.
CONCENTRATION OF REVENUES
See Note B of the Notes to Consolidated Financial Statements on page 53 of
this Report.
BACKLOG
The Company has a $2,871,000 backlog of orders as of August 31, 1999 for
battery packs, electrodes and machine-building contracts. The backlog at August
31, 1998 was $1,584,000 for battery packs, electrodes and machine-building
contracts. The Company expects to fill all of its current backlog within the
current fiscal year.
COMPETITION
The principal competitive advantages of the Company are its ownership of
fundamental patents and enabling technology which cover products and production
technology in the important fields of energy and information as well as its
research and development activities. The Company has entered into joint venture
or licensing agreements with established industrial companies that the Company
believes possess the financial resources and manufacturing and marketing
capabilities to commercialize products based on the Company's technologies in
the areas of consumer rechargeable batteries, EV and hybrid automotive
batteries, scooter batteries, industrial storage batteries, photovoltaic and
information technologies.
-18-
<PAGE>
The Company competes with firms, both domestic and foreign, that
manufacture and sell products, as well as firms that perform research and
development. Some of these firms are among the largest industrial companies in
the world and have well-established product lines, extensive resources and large
research and development staff and facilities.
The Company is currently engaged in manufacturing and selling its
proprietary products through joint ventures and licensing arrangements, as well
as through its own divisions and internal production operations. The ability of
the Company to maintain its competitive leadership in the future will depend not
only on continuing product and technological advances, but also on the strength
and ability of the Company's licensees and joint venture partners.
EMPLOYEES
As of September 24, 1999, the Company had a total of 325 employees,
of which 163 are Ovonic Battery employees. The aforementioned numbers do not
include employees of the Company's joint ventures or licensees. The Company
considers its relations with its employees to be excellent.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the Company's expectations, plans and strategies for the
development and commercialization of products based on its technologies. These
forward-looking statements are generally identified by the use of such terms as
"intends," "expects," "plans," "projects," "estimates," "anticipates," "should"
and "believes."
All of such forward-looking statements are based on assumptions which the
Company, as of the date of this Annual Report, believes to be reasonable and
appropriate. The Company cautions, however, that the actual facts and conditions
that may exist in the future could vary materially from the assumed facts and
conditions upon which such forward-looking statements are based.
The Company's future business prospects are substantially dependent upon
the ability of the Company, its joint venture partners and licensees to develop,
manufacture and sell products based on the Company's technologies. Additional
development efforts will be required before certain products based on the
Company's technologies can be manufactured and sold commercially. There can be
no assurance that certain products based on the Company's technologies can be
manufactured cost effectively on a commercial scale, that such products will
gain market acceptance, or that competing products and technologies will not
render products based on the Company's technologies obsolete or noncompetitive.
-19-
<PAGE>
In certain fields, the Company has entered into licensing or joint venture
agreements with established companies. Any revenues or profits which may be
derived by the Company from these arrangements will be substantially dependent
upon the willingness and ability of the Company's licensees and joint venture
partners to devote their financial resources and manufacturing and marketing
capabilities to commercialize products based on the Company's technologies.
The Company's ability to compete effectively with other companies will
depend, in part, on its ability to protect and maintain the proprietary nature
of its technology. There can be no assurance that the Company's patents or other
proprietary rights will be determined to be valid or enforceable if challenged
in court or administrative proceedings or that the Company patents or other
proprietary rights, even if determined to be valid, will be broad enough in
scope to enable the Company to prevent third parties from producing products
using similar technologies or processes. There can also be no assurance that the
Company will not become involved in disputes with respect to the patents or
proprietary rights of third parties.
The foregoing factors, as well as other factors discussed in this Annual
Report and in other documents and reports filed by the Company with the
Securities and Exchange Commission pursuant to the requirements of the federal
securities laws, could cause the actual facts and conditions that may exist in
the future to vary materially from the assumed facts and conditions upon which
the forward-looking statements contained herein are based.
-20-
<PAGE>
GLOSSARY OF TECHNICAL TERMS
Certain technical terms used herein have the following meanings:
Amorphous - having an atomic structure that is not periodic.
CD-ROM (CD--Read Only Memory) - a type of data-storage media using a CD
format with pre-recorded data which cannot be recorded by the user.
CD-RW (CD--Rewritable Memory) - a type of data storage media using a CD
format employing ECD's proprietary phase-change rewritable optical memory
technology capable of being recorded and re-recorded many times.
Crystalline - having a repeating atomic structure in all three dimensions.
Cycle Life - the number of times a rechargeable battery can be charged and
discharged.
Disordered - lacking order. Order is defined over some scale of length
such as short range, intermediate range or long range and may refer to
atomic position (structural order), type of atom (compositional order), or
other physical properties such as magnetic and electric polarization and
others.
DRAM (Dynamic Random Access Memory) - a type of semiconductor memory
device used for the main system memory in most computers.
Electrode (battery) - the chemically active portions of a battery.
Energy Density - the amount of energy stored in a specific volume or
weight.
EV (Electric Vehicle) - a vehicle propelled exclusively by an electric
drive system powered by an electrochemical energy storage device,
typically a rechargeable battery.
Flash EEPROM (Electrically Erasable Programmable Read Only Memory) - a
type of semiconductor memory device that retains stored data even with the
power off.
FCEV (Fuel Cell Electric Vehicle) - an electric vehicle that derives its
electricity from a fuel cell.
Fuel Cell - a device which produces electric power by oxidizing hydrogen
and exhausting only water as a byproduct.
HEV (Hybrid Electric Vehicle) - a vehicle that is propelled both by an
electrochemical energy storage device coupled to an electric drive and an
auxiliary power unit powered by a conventional fuel such as reformulated
gasoline, direct injection diesel, compressed natural gas or hydrogen.
-21-
<PAGE>
Nonvolatile - a property of some types of computer memory which retain
stored data even when power is removed.
Optical Memory - a computer memory technology that uses lasers to record
and play back data stored on a rotating disc.
Ovonic - [after S.R. Ov(shinsky) + (electr)onic] - the term used to
describe the Company's proprietary materials, products and technologies.
Peak Power - the maximum amount of energy available for a sustained period
of time, typically 10 to 30 seconds.
Phase-Change Rewritable - an optical memory technology invented by the
Company in which data is stored or erased on memory media by means of a
laser beam that switches the structural phase of a thin-film material
between crystalline and amorphous states.
Photovoltaic (PV) - direct conversion of light into electrical energy.
Regenerative Power - the amount of energy made available and returned to
the battery by the recovery of kinetic energy.
Roll-to-Roll Process - a process where a roll of substrate is continuously
converted into a roll of product.
Semiconductor - a class of materials with special electrical properties
used to fabricate solar cells, transistors, integrated circuits and other
electronic devices.
Specific Energy - the amount of energy capacity divided by the weight of
the battery.
Stabilized Energy Conversion Efficiency - the long-term ratio of
electrical output to light input.
Thin Film - a very thin layer of material formed on a substrate.
-22-
<PAGE>
Item 2: Properties
- ------ ----------
A summary of the principal facilities of the Company and Ovonic Battery
follows:
Number of
Location Square Feet
-------- -----------
The Company:
1675 West Maple Road, Troy, 31,550
MI
1050 East Square Lake Road,
Bloomfield Township, MI 11,000
1621 Northwood, Troy, MI 27,480
Ovonic Battery:
1864 Northwood, Troy, MI 12,480
1826 Northwood, Troy, MI 12,480
1707 Northwood, Troy, MI 27,400
1334 Maplelawn, Troy, MI 28,100
1414 Combermere, Troy, MI 9,870
-------
TOTAL 160,360
=======
Except for the property located at 1050 East Square Lake Road, Bloomfield
Township, MI, which is owned by the Company, the foregoing properties, which are
generally of brick and block construction, are leased by the Company. Except for
the property located at 1334 Maplelawn, Troy, MI, which is subleased to GM
Ovonic, the foregoing properties are devoted primarily to the product
development, pre-production and production activities and administrative and
other operations of the Company and Ovonic Battery. Management believes that the
above facilities are generally adequate for present operations.
-23-
<PAGE>
Item 3: Legal Proceedings
- ------ -----------------
There are no legal proceedings to which the Company is a party which
management believes to be material.
Item 4: Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not applicable.
-24-
<PAGE>
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
- ------ ---------------------------------------------------------------------
Shares of the Company's Common Stock, par value $.01 per share ("Common
Stock"), trade on the NASDAQ National Market System under the symbol "ENER."
Shares of the Company's Class A Common Stock, par value $.01 per share ("Class A
Common Stock"), and the Company's Class B Common Stock, par value $.01 per share
("Class B Common Stock"), are not publicly traded.
As of September 24, 1999, there were approximately 2,700 holders of record
of Common Stock, four holders of record of Class A Common Stock and one holder
of record of Class B Common Stock.
The following table sets forth the reported high and low price on the
NASDAQ National Market System for the Company's Common Stock for the following
quarters:
For the Fiscal Year Ended June 30
(in Dollars Per Share)
<TABLE>
<CAPTION>
2000 1999 1998
----------------- ----------------- ----------------
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $15.00 $9.188 $10.250 $ 5.188 $17.00 $10.50
(through Sept. 24,
1999)
Second Quarter $ 8.125 $ 4.625 $16.875 $11.00
Third Quarter $12.938 $ 7.50 $15.375 $12.125
Fourth Quarter $10.50 $ 7.625 $15.25 $ 9.125
</TABLE>
The Company has paid no cash dividends in the past and no cash dividends
are expected to be paid in the foreseeable future.
On April 26, 1999, the Company and EV Global Motors Company ("EV Global")
entered into a Stock Exchange Agreement whereby the Company issued 34,723 shares
of its Common Stock to EV Global and acquired from EV Global 79,092 shares of
Unique Mobility, Inc. ("Unique Mobility") common stock, $.01 par value. These
shares of Unique Mobility common stock, together with the 129,241 shares of
Unique Mobility common stock
-25-
<PAGE>
acquired from EV Global in February 1998, were contributed by the Company for
its interest in a joint venture, Unique Mobility Europa, GmbH, formed by the
Company, Unique Mobility and EV Global in May 1999 to manufacture and sell
battery electric, hybrid electric, and fuel cell electric vehicles for world
markets.
The Company's Common Stock was obtained by EV Global in a private
transaction under Regulation D, Rule 505 of the Securities Act of 1933.
-26-
<PAGE>
Item 6: Selected Financial Data
- ------- -----------------------
Set forth below is certain financial information taken from the Company's
audited consolidated financial statements (See Item 1: Description of Business).
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
Revenues: 1999 1998 1997 1996 1995
- --------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Product sales $ 4,524,238 $ 9,858,343 $ 14,897,144 $ 14,828,133 $ 10,298,019
Royalties 2,735,622 2,485,981 1,394,872 1,321,117 1,205,036
Revenues from product development agreements 17,240,615 15,311,416 5,738,877 7,349,195 11,365,708
Revenues from license and other agreements 4,753,995 1,701,134 5,828,648 12,524,262 17,931,852
Other 3,717,826 2,200,707 1,718,933 1,289,667 543,143
----------- ------------ ------------ ------------ ------------
TOTAL REVENUES 32,972,296 31,557,581 29,578,474 37,312,374 41,343,758
----------- ------------ ------------ ------------ ------------
Net Income (Loss) $(13,777,589) $(16,664,999) $(17,954,612) $ 1,054,269 $ 5,605,664
============= ============= ============= ============ ============
Basic Net Income (Loss) per Common Share $ (1.06) $ (1.50) $ (1.67) $ .11 $ .70
Diluted Net Income (Loss) per Common Share $ (1.06) $ (1.50) $ (1.67) $ .10 $ .63
At year end:
Total Assets $ 39,807,998 $ 51,360,816 $ 37,729,097 $ 57,129,439 $ 23,331,019
Long-Term Liabilities $ 2,679,936 $ 3,967,496 $ 585,795 $ 1,853,728 $ 3,012,079
Working Capital $ 18,438,953 $ 29,800,158 $ 23,161,108 $ 43,524,927 $ 9,310,685
Stockholders' Equity $ 23,188,627 $ 34,815,346 $ 26,418,659 $ 43,734,040 $ 7,899,667
</TABLE>
-27-
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
Results of Operations
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
- -------------------------------------------------------------
The Company had a net loss in the year ended June 30, 1999 of $13,778,000
compared to a net loss of $16,665,000 for the year ended June 30, 1998. The loss
is primarily due to: (i) ongoing product development and continued market
development activities; (ii) losses related to electrode production; (iii)
ongoing protection of the Company's intellectual property and (iv) development
costs of Ovonic Unified Memory ("OUM") microelectronic nonvolatile, thin-film
semiconductor devices. The amount of the net loss for 1999 was partially offset
by a $1,970,000 gain on the sale of Ovonic Battery Company, Inc. ("Ovonic
Battery") stock and a $4,400,000 license fee from Sanyo Electric Co., Ltd.
("Sanyo"). Additionally, included in other income (expense) for 1999 was an
expense of $3,660,000 representing ECD's equity in the net loss from its
investment in United Solar Systems Corp. ("United Solar") joint venture, as
required under Generally Accepted Accounting Principles ("GAAP"), related to
ECD's cash investments in United Solar (see NOTE A of Notes to Consolidated
Financial Statements and Liquidity and Capital Resources).
Product sales, consisting of positive and negative battery electrodes,
battery packs and machine building, decreased 54% to $4,524,000 in the year
ended June 30, 1999 from $9,858,000 in the year ended June 30, 1998. Sales of
negative and positive electrodes decreased $6,179,000 primarily due to one of
the Company's principal negative electrode customers currently manufacturing its
own electrode products and the manufacturing of positive electrodes by GM Ovonic
L.L.C. ("GM Ovonic"), the Company's manufacturing joint venture with General
Motors Corporation ("General Motors"). The Company has continued its development
of advanced electrode materials to be introduced to its customers and made a
substantial investment in hydrogen storage materials. Battery pack sales
increased 156% from $414,000 to $1,060,000 in 1999. Revenues from machine
building were $348,000 in 1999, compared to $148,000 in 1998. The Company
received a contract to build large-area microwave deposition equipment in
February 1999 and recognized revenue of $330,000 in connection with this
contract. The Company is in negotiations with a number of companies for
additional machine-building contracts. (See NOTE B - Notes to Consolidated
Financial Statements.)
Royalties increased 10% to $2,736,000 in the year ended June 30, 1999 from
$2,486,000 in the year ended June 30, 1998 primarily due to higher battery
royalties. While the volume of nickel metal hydride ("NiMH") batteries
currently being sold has increased substantially, the royalties the Company
receives reflect increased production efficiencies of its licensees which have
resulted in lower prices as licensees move aggressively to increase market
share. The Company experienced low levels of royalties from ECD's phase-change
rewritable optical memory technology in 1999 as the Company's licensees prepared
to introduce new types of rewritable media products incorporating
-28-
<PAGE>
ECD's phase-change technology. (See NOTE B - Notes to Consolidated Financial
Statements.)
Revenues from product development agreements increased 13% to $17,241,000
in the year ended June 30, 1999 from $15,311,000 in the year ended June 30, 1998
due to substantially increased revenues from a program with General Motors to
develop batteries for electric and hybrid electric vehicle applications
($8,039,000 in 1999 compared to $6,995,000 in 1998) and from contracts with the
National Institute of Standards and Technology ("NIST") in the Company's battery
and optical memory technologies ($5,606,000 in 1999 compared to $1,797,000 in
1998). Revenues from product development agreements for ECD's photovoltaic
technology increased 36% to $2,928,000 in the year ended June 30, 1999 from
$2,156,000 in the year ended June 30, 1998. (See NOTE B - Notes to Consolidated
Financial Statements.)
The Company has $11,833,000 in unrecognized revenues outstanding under
product development agreements with U.S. government or other agencies or
companies. Without giving effect to any new product development agreements which
may be entered into in the year ending June 30, 2000 and based upon scheduled
funding and performance, $8,665,000 is expected to be recorded in revenues from
product development agreements for the year ending June 30, 2000.
Revenues from license and other agreements increased 179% to $4,754,000 in
the year ended June 30, 1999 from $1,701,000 in the year ended June 30, 1998 due
to a $4,400,000 battery license fee from Sanyo in 1999 and $190,000 in license
fees in 1999 in connection with a new optical memory license agreement with
Ricoh Company Limited of Tokyo, Japan, the world's largest manufacturer of
rewritable compact disks; and a battery license agreement with Japan Storage
Battery Co., Ltd., a Japanese battery manufacturing company. License fees in
1998 include $1,500,000 related to a technology transfer agreement with Sovlux
Battery and the Chepetsky Mechanical Plant, an enterprise of the Russian
Ministry of Atomic Energy. Revenues from license agreements are non-recurring
and are based upon developing new business relationships. The Company is
actively pursuing its strategy to form alliances to commercialize its products.
It is in negotiations with a number of companies which could provide additional
license fees to the Company in the coming year.
Other revenues increased by $1,517,000 (or 69%) to $3,718,000 in the year
ended June 30, 1999 from $2,201,000 in the year ended June 30, 1998 primarily
due to increased billings in 1999 for work performed for Ovonic Battery
licensees and for additional work performed by ECD's Production Technology and
Machine Building Division. In 1998, there were certain adjustments which reduced
revenues to reflect a change in estimate based on information received by the
Company pertaining to certain customers and contracts.
The Company incurred expenses of $29,243,000 ($17,361,000 funded and
$11,882,000 unfunded) in the year ended June 30, 1999 for product development
compared to expenses of $27,031,000 ($15,606,000 funded and $11,425,000
unfunded) in the year ended June 30, 1998. The expenditures were primarily for
continued development of the Company's "family of batteries" products as well
as work performed on
-29-
<PAGE>
the OUM program. The increased expenses of $2,212,000 for product development
were offset by the $1,929,000 increase in revenues from product development
agreements.
The decrease in cost of product sales to $8,136,000 in the year ended
June 30, 1999 from $12,673,000 in the year ended June 30, 1998 was due to the
reduced level of battery electrode sales. While the Company has taken
significant steps to reduce costs, the low sales volume combined with high
fixed costs results in the loss on product sales.
Expenses were incurred in 1999 and 1998 in connection with the protection
of Ovonic Battery's United States patents covering its proprietary technology
for NiMH batteries. These expenses were reduced to $302,000 in the year ended
June 30, 1999 from $363,000 in the year ended June 30, 1998.
Operating, general and administrative expenses increased 1% to $6,930,000
in the year ended June 30, 1999 from $6,828,000 in the year ended June 30, 1998
primarily due to reduced allocations in 1999 to cost of revenues from product
development agreements, costs associated with a restricted stock grant to one of
the Company's executives, increased costs associated with stockholder relations
and other increased costs in 1999.
Other income of $180,000 in the year ended June 30, 1998 compares to other
expense of $784,000 in the year ended June 30, 1999. The $964,000 reduction was
due to a $3,660,000 expense (versus $384,000 in 1998), representing the
Company's equity in the net loss in its investment in United Solar (represented
as a net loss on the Company's financial statements) and higher interest
expense, partially offset by a $1,970,000 gain on the sale of Ovonic Battery
stock in 1999 and higher interest income. This $3,660,000 expense is related to
ECD's cash investments in United Solar's future growth. Under GAAP, ECD must
adjust its investment for its share of the net earnings or losses of United
Solar for each reporting period until ECD's investment is reduced to zero or
exceeds ECD's total cash investment of $5,000,000 at June 30, 1999, regardless
of the true value of the investment.
The Company does business in many different parts of the world and its
royalty revenues are affected by changes in foreign currencies and their
exchange rates relative to the U.S. dollar. However, the vast majority of the
Company's business agreements are denominated in U.S. dollars and, as such, the
Company has minimized its exposure to currency rate fluctuations.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
- -------------------------------------------------------------
The Company had a net loss in the year ended June 30, 1998 of $16,665,000
compared to a net loss of $17,955,000 for the year ended June 30, 1997. The loss
is primarily due to (1) costs of ongoing battery product development and
continued market development; (2) losses related to electrode production as the
Company optimized its product performance; (3) ongoing protection of the
Company's technologies and patents; (4) expenses of additional technical,
manufacturing and engineering support for GM Ovonic in furtherance of NiMH
battery production and ongoing technical assistance to other customers; and (5)
development of OUM.
-30-
<PAGE>
Product sales consisting of positive and negative battery electrodes,
battery packs and machine building, decreased 34% to $9,858,000 in the year
ended June 30, 1998 from $14,897,000 in the year ended June 30, 1997. Sales of
negative and positive electrodes decreased $1,537,000 primarily due to lower
negative electrode prices and lower shipments to its primary customer. Battery
pack sales decreased 82% to $414,000 from $2,333,000 as GM Ovonic, formerly the
Company's principal battery pack customer, began its own production of battery
packs. Revenues from machine building were $148,000 in the year ended June 30,
1998 down from $1,732,000 in the year ended June 30, 1997 principally due to
completion of the machine building projects for GM Ovonic. (See NOTE B - Notes
to Consolidated Financial Statements.)
Royalties increased 78% from $1,395,000 in the year ended June 30, 1997 to
$2,486,000 in the year ended June 30, 1998 due to the issuance in Japan of a
basic NiMH battery patent in August, 1997 to Ovonic Battery, causing NiMH
battery sales in Japan to be royalty bearing, and due to higher sales of NiMH
batteries worldwide. Despite the higher volume of NiMH batteries being sold, the
royalties the Company receives were adversely affected by lower sales prices and
unfavorable exchange rates with the Japanese yen. (See NOTE B - Notes to
Consolidated Financial Statements.)
Revenues from product development agreements increased 167% from
$5,739,000 in the year ended June 30, 1997 to $15,311,000 in the year ended June
30, 1998 due to substantially increased revenues from a program with General
Motors to develop batteries for electric and hybrid electric vehicle
applications ($6,995,000 in 1998 compared to $151,000 in 1997) and from
contracts with NIST in the Company's battery and optical memory technologies
($1,797,000 in 1998 compared to $706,000 in 1997). Revenues from product
development agreements for ECD's photovoltaic technology increased 84% from
$1,169,000 in the year ended June 30, 1997 to $2,156,000 in the year ended June
30, 1998.
Revenues from license and other agreements decreased to $1,701,000 in the
year ended June 30, 1998 from $5,829,000 in the year ended June 30, 1997. 1997
revenues included license fees of $2,000,000 from Sanoh Industrial Co., Ltd.,
$1,000,000 from LG Chemical, Ltd. and $1,246,000 from Canon Inc. in connection
with license agreements with these companies. 1998 revenues from license and
other agreements include fees of $1,500,000 relating to a technology transfer
agreement with Sovlux Battery and the Chepetsky Mechanical Plant.
Other revenues increased by $482,000 from $1,719,000 in the year ended
June 30, 1997 to $2,201,000 in the year ended June 30, 1998 primarily due to
increased billings for work performed for licensees of Ovonic Battery, partially
offset by certain adjustments reducing revenues in 1998 to reflect a change in
estimate of revenues based on information received by the Company pertaining to
certain customers and contracts.
The Company incurred expenses of $27,031,000 ($15,606,000 funded and
$11,425,000 unfunded) in the year ended June 30, 1998 for product development
compared to expenses of $20,394,000 ($5,871,000 funded and $14,523,000 unfunded)
in the year ended June 30, 1997. This planned increase in expenditures for
product development was primarily for continued development of the Company's
"family of
-31-
<PAGE>
batteries" products. The increased expenses of $6,637,000 for product
development were offset by the $9,572,000 increase in revenues from product
development agreements.
The decrease in cost of product sales to $12,673,000 in the year ended
June 30, 1998 from $16,964,000 in the year ended June 30, 1997 was principally
due to the reduced level of machine building for GM Ovonic and reduced sales of
battery packs as GM Ovonic ramped-up its production.
Expenses were incurred in 1998 and 1997 in connection with the defense and
prosecution of litigation with respect to Ovonic Battery's United States patents
covering its proprietary technology for NiMH batteries. These expenses were
reduced to $363,000 in the year ended June 30, 1998 from $3,011,000 in the year
ended June 30, 1997 and relate primarily to the successful conclusion of
litigation involving Matsushita Battery Industrial Co., Ltd. in December 1997.
Operating, general and administrative expenses decreased to $6,828,000 in
the year ended June 30, 1998 from $7,235,000 in the year ended June 30, 1997 due
to increased allocations in 1998 to cost of revenues from product development
agreements which offset higher spending.
Other income of $1,073,000 in the year ended June 30, 1997 compares to
other income of $180,000 in the year ended June 30, 1998. The reduction was due
principally to decreased interest income in 1998 and the recording of the
Company's share of losses of United Solar of $384,000 for 1998 related to the
Company's $2,500,000 investment in United Solar in May 1998.
Liquidity and Capital Resources
As of June 30, 1999, the Company had unrestricted consolidated cash, cash
equivalents and accounts receivable of $26,797,000, a decrease of $9,147,000
from June 30, 1998. As of June 30, 1999, the Company had consolidated working
capital of $18,439,000 compared with a consolidated working capital of
$29,800,000 as of June 30, 1998.
ECD has formed a new joint venture, Ovonyx, Inc. ( "Ovonyx") with Tyler
Lowrey, a recognized authority in semiconductor memory technology and former
vice chairman and chief technology officer of Micron Technology, Inc. The joint
venture, owned equally by ECD and Mr. Lowrey, expects to pursue device
manufacturing as well as licensing of selected applications of ECD's OUM, a
unique thin-film nonvolatile solid-state memory. Ovonyx and ECD are in
negotiations with new strategic partners for financing to commercialize its OUM.
The Company's strategy is to finance its growth through strategic
alliances (joint ventures and license agreements) with third parties who can
provide financial resources and marketing expertise for the Company's
technologies and products. As a result of the issuance of the basic patents for
NiMH batteries and phase-change optical memory in Japan, various new agreements
are under discussion. Another important area of the
-32-
<PAGE>
Company's development is the use of the Company's proprietary hydrogen storage
technology for storing, transporting and using hydrogen for a wide range of
portable and stationary applications, with vehicles being of prime importance.
In July 1999, ECD and Shell Hydrogen, a unit of Royal Dutch shell Group,
announced the signing of a memorandum of understanding to explore the
establishment of a joint venture which would further develop and commercialize
the Company's proprietary solid hydrogen storage technology. Shell Hydrogen
will provide refueling and distribution expertise.
During the year ended June 30, 1999, $5,777,000 of cash was used in
operations. The difference between the net loss of $13,778,000 and the net cash
used in operations was due to ECD's $3,660,000 share of the losses in United
Solar relating to the Company's investment of cash in United Solar's future
growth, the $1,970,000 gain on the sale of Ovonic Battery stock, depreciation
expense and changes in working capital. In 1999, ECD invested $2,500,000 in
United Solar (bringing its total investment to $5,000,000), providing funding
for new opportunities in the worldwide photovoltaic market served by United
Solar's unique products which offer particular advantages to the satellite and
telecommunications industries. In addition, $1,322,000 of machinery and
equipment was purchased or constructed, principally for the Company's battery
operations during this period. The Company also received $2,970,000 related to
the sale of Ovonic Battery Company stock.
The Company has had two major electrode customers for its battery
electrode products, GP Batteries International Limited ("GP Batteries") and GM
Ovonic. GP Batteries, a licensee, pays royalties and is currently manufacturing
its own electrode products. The Company is developing new electrode materials
that are being offered to customers and is adjusting its manufacturing processes
for electrodes to customer specifications.
The Company expects significant revenues and cash flows related to product
development agreements, many of which already exist, that are entered into by
the Company with U.S. government agencies and with industry partners to develop
the Company's products and production technology. In October 1998, ECD was
awarded two contracts by the Department of Energy: (1) a 50% cost-shared
cooperative agreement to develop and demonstrate an integrated system for the
production and storage of clean, renewable hydrogen fuel for transportation and
other applications in the developing world, and (2) a 50% cost-shared contract
to develop and demonstrate a high-rate thin-film deposition process to further
reduce photovoltaic manufacturing costs. Revenues under these contracts are
recognized as the work is performed. Contracts with industry partners include a
program with General Motors to develop next generation batteries for electric
and hybrid electric vehicle applications which is presently projected to
conclude in the Fall of 1999.
Three contracts awarded in the Fall of 1997 to the Company under NIST
Advanced Technology Programs will also contribute to cash flows. One contract
($6,400,000) was awarded to Ovonic Battery to develop the next generation of
high-energy density NiMH batteries using low-cost magnesium-based hydrogen
storage materials. The other two NIST contracts for ($2,000,000 and $2,650,000)
were awarded to ECD to support development of a new, low-cost manufacturing
system for DVD (digital versatile disks) based on ECD's proprietary phase-change
optical memory technology and for further
-33-
<PAGE>
development of the phase-change optical memory products. One of these contracts
will conclude in the Fall of 1999 and the other will conclude in the Fall of
2000. Generally, the agreed-upon fees for these product development agreements
reimburse the Company for its direct costs associated with these projects,
together with a portion of indirect costs (patents, operating, general and
administrative expenses and depreciation).
During the next 12 months, the Company expects to purchase up to $500,000
of machinery and equipment. In addition to its $2,500,000 investment in May
1998, ECD invested $2,500,000 in United Solar during the year ended June 30,
1999 and has advanced an additional $300,000 during the period July 1, 1999 to
September 28, 1999.
The Company has a financing arrangement with Standard Federal Bank for a
$3,000,000 line of credit bearing an interest rate at prime rate which expires
on March 31, 2001. The Company does not expect to use any of this available
financing during the next 12 months.
The Company's strategy is to finance its growth through the formation of
strategic alliances to further commercialize its products. While the Company is
in negotiations concerning its NiMH battery, hydrogen storage, photovoltaic,
OUM, optical memory and production systems technologies with a number of
companies which could provide it with additional revenue under license and other
agreements in the coming year, it is unable to predict the amount, if any, of
such revenue.
The Company is not aware of events or circumstances that would
significantly alter royalty revenues for the next 12 months.
In February 1999, ECD received a contract (for approximately $2,060,000)
to build large-area microwave deposition equipment. This new contract provides
the platform for the commercialization of ECD's passive coatings technology and
equipment to manufacture products incorporating such technology. The receipt of
this order directly results from the research and development conducted by the
Company, the costs of which were recorded as losses in prior years. The contract
provides for progress payments over the next 16 months. Through June 30, 1999,
ECD has recognized revenues of $330,000 in connection with this contract.
Machine building is a cyclical but an important part of ECD's business. While
there is no other backlog of machine-building contracts as of June 30, 1999,
negotiations are in progress with a number of companies for additional machine-
building contracts that could provide revenues in the coming year and beyond.
Based upon the above information, the amount of cash to be received under
existing product development agreements in the year ending June 30, 2000 is
anticipated to be approximately $12,049,000 compared to $19,164,000 received
from product development agreements in the year ended June 30, 1999. Based on
historical trends, the amount of cash from royalties to be received in the year
ending June 30, 2000 is expected to be, approximately $3,022,000 compared to
$2,367,000 received in the year ended June 30, 1999.
-34-
<PAGE>
Since license agreements are continuously being negotiated, fees from such
agreements are difficult to predict. The Company is unable to forecast the
amount of cash to be received from license fees in the year ending June 30,
2000.
Management believes that funds generated from operations, new business
agreements and existing cash and cash equivalents will be adequate to support
and finance planned growth, capital expenditures and company-sponsored product
development programs over the coming year. Additional sources of cash are
required to sustain the Company for the long-term and to build the business in
the future. While it is the Company's intent to fund its near-term operations
from cash and cash equivalent balances on hand and from activities such as
product sales, licensing, royalties, product development agreements and
strategic alliances, the amount and timing of revenues from such activities are
uncertain. The Company is in discussions with third parties to form joint
ventures, and to engage in machine building and licensing and may also consider
equity or debt financing in order to fund its growth in certain strategic areas.
Year 2000 Issue
Historically, many computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
program failing to properly recognize a year that begins with "20" instead of
"19." This, in turn, could result in major system failures or miscalculations
and is generally referred to as the "Year 2000 Issue."
The Company formulated a Year 2000 Plan to address the Company's Year 2000
Issues. The Company's own internal systems are a primary area of focus. In July
1997, the Company installed a new computer system to help manage its financial,
business reporting and data processing software applications. The providers of
the application software used in the new computer system have represented the
software to be Year 2000 compliant. The Company has successfully completed its
own evaluation of the software.
The Company evaluated its other software applications, including, but not
limited to, its computerized laboratory manufacturing equipment and embedded
chips, to identify any Year 2000 Issues to ensure that there are no material
disruptions in the Company's operations.
The Company's Year 2000 Plan is to:
o Inventory hardware, software and equipment
o Test and/or confirm hardware, software and equipment
considered Year 2000 compliant
o Identify Year 2000 issues
o Determine necessary measures to address issues
o Implement remedies
o Test and confirm
The Company has completed these steps to a significant degree.
-35-
<PAGE>
Most non-compliant software was upgraded from equipment manufacturers and
software providers. The cost of Year 2000 compliance was less than $250,000 and
was comprised of the purchase of upgraded software and new or upgraded
computers.
If the Company's new computer system fails with respect to the Year 2000
Issue or if any applications or embedded chips critical to the Company's
manufacturing process are overlooked, there could be a material adverse impact
on the business operations or financial performance of the Company.
Additionally, there can be no assurance that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the business
operations or financial performance of the Company. In particular, if
third-party providers, due to the Year 2000 Issue, fail to provide the Company
with components, materials or energy which are necessary to timely complete
contractual requirements or to manufacture its products, then any such failure
could have a material adverse effect on the business operations and financial
performance of the Company. The Company believes that the most reasonably likely
worst case scenario is that a small number of vendors will be unable to supply
components for a short period of time after January 1, 2000.
The Company is preparing a contingency plan that will address unavoided or
unavoidable risks and expects to have the contingency plan in place by October
1999.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
Not applicable.
-36-
<PAGE>
Item 8: Consolidated Financial Statements and Supplementary Data
- ------ --------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
Board of Directors
Energy Conversion Devices, Inc.
Troy, Michigan
We have audited the accompanying consolidated balance sheets of Energy
Conversion Devices, Inc. and subsidiary (the "Company") as of June 30, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1999 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Detroit, Michigan
September 24, 1999
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<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS (NOTE A)
Cash, including cash equivalents of
$19,026,000 at June 30, 1999 and
$25,780,000 at June 30, 1998 $ 19,076,983 $ 25,786,112
Accounts receivable (net of allowance for
uncollectible accounts of approximately
$303,000 at June 30, 1999 and $315,000
at June 30, 1998) 6,296,097 8,666,952
Amounts due from related parties 1,423,828 1,491,115
Inventories 589,245 1,074,097
Prepaid expenses and other current assets -- 374,590
------------ ------------
TOTAL CURRENT ASSETS 27,386,153 37,392,866
PROPERTY, PLANT AND EQUIPMENT (NOTES A and E)
Land and land improvements 312,588 312,588
Buildings and improvements 3,733,816 3,666,411
Machinery and other equipment (including construction in
progress of approximately $844,000 and $785,000 at
June 30, 1999 and 1998) 18,353,014 16,870,261
Capitalized lease equipment 4,988,672 5,383,672
------------ ------------
27,388,090 26,232,932
Less accumulated depreciation
and amortization (19,449,827) (17,641,505)
------------- -------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 7,938,263 8,591,427
Investments in EV Global, Unique Mobility and Unique
Europa (NOTE A) 2,239,716 1,953,000
JOINT VENTURES (NOTE D)
United Solar 956,411 2,115,914
GM Ovonic -- --
Sovlux -- --
OTHER ASSETS 1,287,455 1,307,609
------------- -------------
TOTAL ASSETS $ 39,807,998 $ 51,360,816
============= =============
</TABLE>
See notes to consolidated financial statements.
-38-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,707,158 $ 4,443,189
Salaries, wages and amounts withheld
from employees 1,581,447 1,413,217
Deferred revenues under business
agreements (NOTE A) 1,349,087 417,082
Current installments on long-term
liabilities (NOTE E) 1,309,508 1,319,220
------------ ------------
TOTAL CURRENT LIABILITIES 8,947,200 7,592,708
LONG-TERM LIABILITIES (NOTE E) 2,679,936 3,967,496
DEFERRED GAIN 1,110,132 1,551,146
NON-REFUNDABLE ADVANCE ROYALTIES
(NOTE C) 3,882,103 3,434,120
------------ ------------
TOTAL LIABILITIES 16,619,371 16,545,470
STOCKHOLDERS' EQUITY
Capital Stock (NOTES F and G)
Class A Convertible Common Stock,
par value $0.01 per share:
Authorized - 500,000 shares
Issued & outstanding - 219,913 shares 2,199 2,199
Class B Convertible Common Stock,
par value $0.01 per share
Authorized, Issued and Outstanding - 430,000 shares 4,300 --
Common Stock, par value $0.01 per share:
Authorized - 20,000,000 shares
Issued & outstanding - 12,841,270
shares at June 30, 1999 and
12,639,817 shares at June 30, 1998 128,413 126,398
Additional paid-in capital 233,861,099 227,092,920
Accumulated Other Comprehensive Loss (Note A) -- (47,000)
Accumulated deficit (205,527,952) (191,750,363)
Treasury stock at cost - 109,400 shares at June 30, 1999
and 42,000 shares at June 30, 1998 (1,028,092) (608,808)
Unearned Compensation on Class B Convertible
Common Stock (4,251,340) --
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 23,188,627 34,815,346
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 39,807,998 $ 51,360,816
============= =============
</TABLE>
See notes to consolidated financial statements.
-39-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES (NOTES A and B)
Product sales $ 4,524,238 $ 9,858,343 $ 14,897,144
Royalties 2,735,622 2,485,981 1,394,872
Revenues from product development
agreements 17,240,615 15,311,416 5,738,877
Revenues from license and other agreements 4,753,995 1,701,134 5,828,648
Other 3,717,826 2,200,707 1,718,933
------------ ------------ ------------
TOTAL REVENUES 32,972,296 31,557,581 29,578,474
EXPENSES
Cost of product sales (NOTE A) 8,136,000 12,673,323 16,964,429
Cost of revenues from product
development agreements (NOTE A) 17,361,358 15,605,895 5,870,725
Product development and research (NOTE A) 11,881,945 11,425,333 14,523,269
Patent Defense (NOTE A) 301,670 363,164 3,011,133
Patents (NOTE A) 1,354,826 1,506,860 1,001,486
Operating, general and administrative 6,930,251 6,827,579 7,235,003
------------ ------------ ------------
TOTAL EXPENSES 45,966,050 48,402,154 48,606,045
------------ ------------ ------------
LOSS FROM OPERATIONS (12,993,754) (16,844,573) (19,027,571)
OTHER INCOME (EXPENSE):
Gain on sale of Ovonic Battery Company stock 1,970,000 -- --
Equity in loss from investment in United Solar (3,659,503) (384,000) --
Loss on Unique Mobility Stock (212,541) -- --
Interest expense (563,613) (137,541) (384,468)
Interest income 1,186,528 598,940 1,308,344
Other nonoperating income - (net) 495,294 102,175 149,083
------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) (783,835) 179,574 1,072,959
------------- ------------- -------------
NET LOSS $(13,777,589) $(16,664,999) $(17,954,612)
============= ============= =============
BASIC NET LOSS PER
SHARE (NOTE H) $ (1.06) $ (1.50) $ (1.67)
============= ============= =============
DILUTED NET LOSS PER
SHARE (NOTE H) $ (1.06) $ (1.50) $ (1.67)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
-40-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES F and G)
---------------------------------------------------------------
Three years ended June 30, 1999
<TABLE>
<CAPTION>
Class A
Convertible
Common Stock Common Stock Treasury Stock Unearned
-------------- ------------------- ------------------- Compensa-
Accumulated tion on
Number Number Additional Other Com- Number Class B Total
of of Paid-In prehensive Accumulated of Common Stockholders'
Shares Amount Shares Amount Capital Loss Deficit Shares Amount Stock Equity
------- ------ ---------- -------- ------------ ----------- -------------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
July 1,1996 219,913 $2,199 10,489,591 $104,896 $200,757,697 $ 0 $(157,130,752) 0 0 $ 0 $ 43,734,040
Net loss for
year ended
June 30,
1997 (17,954,612) (17,954,612)
Issuance of
stock to
directors
and consultants 3,040 31 119,172 119,203
Common stock
issued in
connection
with exercise
of stock options
and warrants 110,620 1,106 1,127,730 1,128,836
Purchase of
treasury stock (42,000) $(608,808) (608,808)
------- ------ ---------- -------- ------------ -------------- -------- ---------- -------------
Balance at
June 30,1997 219,913 2,199 10,603,251 106,033 202,004,599 (175,085,364) (42,000) (608,808) 26,418,659
Net loss for
year ended
June 30, 1998 (16,664,999) (16,664,999)
Issuance of
stock to
directors and
consultants 3,564 36 84,960 84,996
Public Offering
of common stock
and warrants 1,750,000 17,500 21,704,450 21,721,950
Common stock
issued in con-
nection with
exercise of
stock options
and warrants
and conversion
of certain
securities 135,866 1,358 1,300,382 1,301,740
Common stock
issued in
connection
with con-
version of CICs 212 2 (2)
Common stock and
warrants issued
to EV Global 146,924 1,469 1,998,531 2,000,000
Unrealized loss
on investment (47,000) (47,000)
------- ------ ---------- -------- ------------ ----------- -------------- -------- ---------- -------- ------------
Balance at
June 30,1998 219,913 $2,199 12,639,817 $126,398 $227,092,920 $(47,000) $(191,750,363) (42,000) $(608,808) $ 0 $34,815,346
======= ====== ========== ======== ============ =========== ============== ======== ========== ======== ============
(Continued on next page.)
</TABLE>
-41-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES F and G)
---------------------------------------------------------------
Three years ended June 30, 1999
(CONTINUED)
<TABLE>
<CAPTION>
Class A
and Class B
Convertible Unearned
Common Stock Common Stock Treasury Stock Compen-
-------------- ------------------- Accumulated ------------------ sation on
Number Number Additional Other Com- Number Class B Total Stock-
of of Paid-In prehensive Accumulated of Common holders'
Shares Amount Shares Amount Capital Loss Deficit Shares Amount Stock Equity
------- ------ ---------- -------- ------------ ---------- -------------- -------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30,
1998 219,913 $2,199 12,639,817 $126,398 $227,092,920 $(47,000) $(191,750,363) (42,000) $(608,808)$ 0 $34,815,346
Net loss
for year
ended June
30,1999 (13,777,589) (13,777,589)
Issuance
of Class
B Convert-
ible Com-
mon Stock 430,000 4,300 4,591,540 (4,591,540) 4,300
Earned Com-
pensation
on Class
B Convert-
ible Common
Stock 340,200 340,200
Issuance of
stock to
directors
and con-
sultants 5,000 50 39,950 40,000
Common Stock
issued in
connection
with exercise
of stock
options and
warrants and
conversion
of CICs 161,730 1,617 1,583,045 1,584,662
Common stock
issued in
connection
with Unique
Europa 34,723 348 439,602 439,950
Stock Options
issued to
non-employees -- -- 114,042 114,042
Purchase of
Treasury
stock (67,400) (419,284) (419,284)
Realized
loss on
investment 47,000 47,000
------- ------ ---------- -------- ------------ --------- -------------- --------- ------------- ----------- -----------
Balance at
June 30,
1999 649,913 $6,499 12,841,270 $128,413 $233,861,099 -- $(205,527,952) (109,400) $(1,028,092) $(4,251,340) $23,188,627
======= ====== ========== ======== ============ ========= ============== ========= ============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
-42-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(13,777,589) $(16,664,999) $(17,954,612)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,974,726 2,130,494 2,312,661
Equity in loss from investment in United Solar 3,659,503 384,000
Gain on sale of Ovonic Battery stock (1,970,000) -- --
Creditable royalties (52,017) (257,366) (62,743)
Options issued to executive
for services rendered 453,000 453,000 453,000
Stock issued for services rendered 494,242 84,996 119,203
Loss on Unique Mobility Stock 212,541 -- --
Gain on sale of equipment -- -- (13,544)
Amortization of deferred gain (441,014) (274,025) (462,660)
Changes in working capital:
Accounts receivable and amounts due from
related parties 2,438,142 2,452,160 277,004
Inventories 484,852 551,968 1,649,070
Prepaid expenses and other assets 382,435 (487,905) (27,729)
Accounts payable and accrued expenses 432,199 1,042,793 (272,611)
Deferred revenues under business agreements (67,995) (254,449) (40,363)
------------- ------------- -------------
NET CASH USED IN OPERATIONS (5,776,975) (10,839,333) (14,023,324)
------------- ------------- -------------
INVESTING ACTIVITIES:
Investment in United Solar (2,500,000) (2,499,914) --
Purchases of capital equipment (net) (1,321,562) (1,701,536) (3,577,478)
Purchase of investments -- (3,085,435) (3,903,820)
Sales of investments -- 4,145,368 13,171,239
Proceeds from sale of capital equipment -- -- 9,342
------------- ------------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,821,562) (3,141,517) 5,699,283
------------- ------------- -------------
FINANCING ACTIVITIES:
Purchase of treasury stock (419,284) -- (608,808)
Principal payments under short-term and long-term debt
obligations and capitalized lease obligations (1,297,272) (1,604,599) (1,259,511)
Proceeds from capital lease transactions -- 4,530,725 12,927
Proceeds from sale of stock of subsidiary 2,970,000 -- --
Net Proceeds from sale of stock and warrants 4,300 21,721,950 --
Proceeds from sale of stock upon exercise of stock
options and warrants 1,131,664 848,741 675,836
Proceeds from nonrefundable advance royalties 500,000 -- --
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,889,408 25,496,817 (1,179,556)
------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (6,709,129) 11,515,967 (9,503,597)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,786,112 14,270,145 23,773,742
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,076,983 $ 25,786,112 $ 14,270,145
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
-43-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
<S> <C> <C> <C>
Cash paid for interest $ 563,613 $ 137,541 $ 384,468
The Company's non-cash investing and financing
activities were as follows:
Investments in EV Global/Unique Mobility $ 439,950 $ 2,000,000
</TABLE>
See notes to consolidated financial statements.
-44-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies
- ---------------------------------------
Nature of Business
- ------------------
Energy Conversion Devices, Inc. ("ECD") has established a
multi-disciplinary business, scientific and technical organization to
commercialize products based on its technologies. Its activities range from
product development to manufacturing and selling products as well as designing
and building production machinery with an emphasis on alternative energy and
advanced information technologies.
Financial Statement Presentation and Principles of Consolidation
- ----------------------------------------------------------------
The consolidated financial statements include the accounts of ECD and its
approximately 91% owned subsidiary Ovonic Battery Company, Inc. ("Ovonic
Battery"), a company formed to develop and commercialize ECD's Ovonic nickel
metal hydride ("NiMH") battery technology (collectively "the Company"). The
remaining shares of Ovonic Battery are owned by Honda Motor Company, Ltd.
("Honda"), Sanoh Industrial Company, Ltd. ("Sanoh") and Sanyo Electric Company,
Ltd. ("Sanyo"). Due to cumulative losses incurred by Ovonic Battery, no
minority interest is recorded in the consolidated financial statements. See
Note D for discussion of these ventures.
ECD also has two major investments accounted for by the equity method:
(i) United Solar Systems Corp. ("United Solar") (49.98%), ECD's photovoltaic
(solar energy) joint venture with Canon Inc. of Japan ("Canon") and (ii) GM
Ovonic L.L.C. ("GM Ovonic") (40%), Ovonic Battery's joint venture with General
Motors Corporation ("General Motors") to manufacture and sell the Company's
proprietary NiMH batteries for electric and hybrid electric vehicle applications
worldwide. In addition, ECD has a 50%-owned joint venture in Russia, Sovlux
Co., Ltd. ("Sovlux").
Upon consolidation, all intercompany accounts and transactions are
eliminated.
Certain items for the years ended June 30, 1998 and 1997 have been
reclassified to be consistent with the classification of items in the year ended
June 30, 1999.
In preparing financial statements in conformity with Generally Accepted
Accounting Principles ("GAAP"), management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reported period. Actual results
could differ from those estimates. In addition, the Company has certain
concentrations of revenues as described in Note B. The Company is impacted by
other factors such as the continued receipt of contracts from the U.S.
-45-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
government and industrial partners, its ability to protect and maintain the
proprietary nature of its technology, its continued product and technological
advances and the strength and ability of the Company's licensees and joint
venture partners to commercialize the Company's products and technologies.
During the first quarter of the 1999 fiscal year, the Company adopted SFAS
No. 130, Reporting Comprehensive Income. This Statement requires that all items
recognized under accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the same
prominence as other financial statements. This Statement also requires that an
entity classify items of other comprehensive earnings by their nature in an
annual financial statement. For example, other comprehensive earnings include
unrealized gains and losses on marketable securities classified as
available-for-sale. The Company's total comprehensive income (loss) was as
follows:
Year Ended
June 30
------------------------------------
1999 1998
---- ----
Net Loss $(13,777,589) $(16,664,999)
OTHER COMPREHENSIVE LOSSES:
Realized (Unrealized) losses on securities 47,000 (47,000)
------------ -------------
COMPREHENSIVE LOSS $(13,730,589) $(16,711,999)
============= =============
Cash Equivalents
- ----------------
Cash equivalents consist of investments in short-term, highly liquid
securities having a maturity of three months or less from the date of
acquisition.
Investments in EV Global Motors Company ("EV Global"), Unique Mobility, Inc.
("Unique Mobility") and Unique Mobility Europa GmbH ("Unique Europa")
- ----------------------------------------------------------------------------
The Company accounts for its investment in EV Global, a non-public
company, under the cost method of accounting. The Company accounts for its
investment in Unique Europa on the equity basis of accounting in accordance with
APB No. 18, The Equity Method of Accounting for Investments in Common Stock. The
Company accounted for its investment in Unique Mobility in accordance with SFAS
115, Accounting for Certain Investments in Debt and Equity Securities, and has
classified this security as available-for-sale. Unrealized gains or losses as a
result of changes in the market value of the Unique Mobility investments were
marked-to-market, with the offset recorded to Stockholders' Equity.
-46-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
Financial Instruments
- ---------------------
The Company considers the carrying value of its financial instruments to
be a reasonable estimate of fair value.
Translation Gains and Losses
- ----------------------------
Since all of the Company's contracts and transactions are denominated and
settled in U.S. dollars, there are no foreign currency gains or losses.
Accounts Receivable
- -------------------
The following tabulation shows the component elements of accounts
receivable from long-term contracts, royalties and other programs:
June 30,
------------------------------
1999 1998
---- ----
U.S. Government:
Amounts billed $ 1,055,313 $ 717,281
Unbilled 876,649 812,439
----------- ------------
Total 1,931,962 1,529,720
----------- ------------
Commercial Customers:
Amounts billed 910,848 5,480,895
Related party billed
- United Solar 184,200 169,847
- GM Ovonic 830,875 729,561
Royalties 1,430,731 1,157,619
License fees -- 300,000
Due per contracts 2,101,833 353,954
Related party unbilled
- GM Ovonic 408,753 591,707
Other unbilled 116,236 2,358
----------- ------------
Total 5,983,476 8,785,941
----------- ------------
Other 107,487 157,406
Allowance for Uncollectible Accounts (303,000) (315,000)
------------ -------------
TOTAL $ 7,719,925 $10,158,067
=========== ============
Amounts due per contracts, related party unbilled and other unbilled from
commercial customers represent revenues recognized for the present value of
license payments to be received in future periods. They also include revenues
recognized on the percentage-of-completion method of accounting related to
machine-building contracts and
-47-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
amounts earned under certain commercial contracts, for which amounts are billed
in subsequent months.
Certain contracts with the U.S. government require a retention that is
paid upon completion of audit of the Company's indirect rates. There are no
material retentions at June 30, 1999 and 1998. Certain U.S. government contracts
remain subject to audit. Management believes that adjustments, if any, which may
result from an audit would not be material to the financial position or results
of operations of the Company.
Inventories
- -----------
Inventories of raw materials, work in process and finished goods for the
manufacture of negative electrodes, battery packs and other products, together
with supplies, are valued at the lower of cost (moving average) or market. Cost
elements included in inventory are materials, direct labor and manufacturing
overhead. Cost of sales is removed from inventory based on actual costs of items
shipped to customers.
Inventories (principally those of Ovonic Battery) are as follows:
Years Ended June 30,
---------------------------
1999 1998
---- ----
Finished products $ 1,000 $ 119,649
Work in process 286,193 511,582
Raw materials 302,052 442,866
------------ -----------
$ 589,245 $ 1,074,097
============ ===========
Property, Plant and Equipment
- -----------------------------
All properties are recorded at cost. Plant and equipment are depreciated
on the straight-line method over the estimated useful lives of the individual
assets. The estimated lives of the principal classes of assets are as follows:
Years
-----
Buildings and improvements 5 to 20
Machinery and other equipment 3 to 10
Capitalized lease equipment and
leasehold improvements 3 to 5
Capitalized lease equipment and leasehold improvements are amortized over
the shorter of the term of the lease or the life of the equipment or
improvement, usually three
-48-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
to five years. Accumulated amortization on capitalized lease equipment as of
June 30, 1999 and June 30, 1998 was $1,287,000 and $258,800, respectively.
Costs of machinery and other equipment acquired or constructed for a
particular product development project, which have no alternative future use
(in other product development projects or otherwise), are charged to product
development and research costs as incurred.
Expenditures for maintenance and repairs are charged to operations.
Expenditures for betterments or major renewals are capitalized and are
depreciated over their estimated useful lives.
Product Development and Research
- --------------------------------
Product development and research costs are recognized as losses as they
are incurred, and as such, the Company's investments in its technologies are
recorded at zero. The technology investments are the basis by which the Company
is able to enter into license and joint venture agreements.
Total direct product development and research costs, a portion of which
are included in cost of revenues from product development agreements, were
$22,785,000, $21,247,000 and $16,732,000 for the three years ended June 30,
1999, 1998 and 1997, respectively.
Patents
- -------
Patent expenditures are charged directly to expense. Total patent
expenditures were $1,355,000, $1,507,000 and $1,001,000 for the three years
ended June 30, 1999, 1998 and 1997, respectively. Patent defense expenditures,
which are incurred by the Company to protect its patents and to defend or
prosecute claims involving the Company's patents, are charged directly to
expense.
Product Sales
- -------------
Product sales include battery electrodes, revenues related to building of
battery packs, and revenues related to machine-building contracts. Revenues
related to machine-building contracts are recognized on the
percentage-of-completion method of accounting using the costs incurred to date
as a percentage of the total expected costs. All other product sales are
recognized when the product is shipped. In certain cases,
-49-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
costs of sales exceeds product sales due to significant changes in products,
manufacturing methods and sales volume.
Royalties
- ---------
Most license agreements provide for the Company to receive royalties from
the sale of products which utilize the licensed technology. Typically, the
royalties are incremental to and distinct from the license fee and are
recognized as revenue upon the sale of the respective licensed product. In
several instances, the Company has received cash payments for nonrefundable
advance royalty payments which are creditable against future royalties under
the licenses. Advance royalty payments are deferred and recognized in revenues
as the creditable sales occur, the underlying agreement expires, or when the
Company has demonstrable evidence that no additional royalties will be
creditable and, accordingly, the earnings process is completed.
For both ECD and Ovonic Battery royalties, there are royalty trust or
contingent fee arrangements whereby the Company is obligated to pay a trust 25%
of optical memory royalties received and a law firm 25% of Ovonic Battery
royalties received relative to consumer battery licenses entered into in 1995
in settlement of an International Trade Commission action.
Business Agreements
- -------------------
A substantial portion of revenues are derived through business agreements
for the development and/or commercialization of products based upon the
Company's proprietary technologies. Such agreements are of two types.
The first type of business agreement relates to licensing the Company's
proprietary technology. Licensing activities are tailored to provide each
licensee with the right to use the Company's technology, most of which is
patented, for a specific product application or, in some instances, for further
exploration of new product applications of such technologies. The terms of such
licenses, accordingly, are tailored to address a number of circumstances
relating to the use of such technology which have been negotiated between the
Company and the licensee. Such terms generally address whether the license will
be exclusive or nonexclusive, whether the licensee is limited to very narrowly
defined applications or to broader-based product manufacture or sale of products
using such technologies, whether the license will provide royalties for products
sold which employ such licensed technology and how such royalties will be
measured, as well as other factors specific to each negotiated arrangement. In
some cases, licenses relate
-50-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
directly to product development that the Company has undertaken pursuant to
product development agreements; in other cases, they relate to product
development and commercialization efforts of the licensee and other agreements
combine the efforts of the Company with those of the licensee.
License agreement fees are generally recognized as revenue at the time the
agreements are consummated, which is the completion of the earnings process.
Typically, such fees are nonrefundable, do not obligate the Company to incur any
future costs or require future performance by the Company and are not related to
future production or earnings of the licensee. License fees payable in
installments are recorded at the present value of the amounts to be received,
taking into account the collectibility of the license fee. In some instances, a
portion of such license fees is contingent upon the commencement of production
or other uncertainties. In these cases, license fee revenues are not recognized
until commencement of production or the resolution of uncertainties. There are
no current or future direct costs associated with license fees.
In the second type of agreement, product development agreements, the
Company conducts specified product development projects related to one of its
principal technology specializations for an agreed-upon fee. Some of these
projects have stipulated performance criteria and deliverables whereas others
require "best efforts" with no specified performance criteria. Revenues from
product development agreements that contain specific performance criteria are
recognized on a percentage-of-completion basis which matches the contract
revenues to the costs incurred on a project based on the relationship of costs
incurred to estimated total project costs. Revenue from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the
agreed-upon fees for product development agreements contemplate reimbursing the
Company for costs considered associated with project activities including
expenses for direct product development and research, patents, operating,
general and administrative expenses and depreciation. Accordingly, expenses
related to product development agreements are recorded as cost of revenues from
product development agreements.
Overhead Allocations
- --------------------
The Company allocates overhead to product development research expenses
and to cost of revenues from research and development agreements based on a
percentage of direct labor costs. For cost of revenues from product development
agreements, this allocation is limited to the amount of revenues, after direct
expenses, under the applicable
-51-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A - Summary of Accounting Policies - (Continued)
- -----------------------------------------------------
agreements. Overhead is allocated to cost of product sales through the
application of overhead to inventory costs.
Other Operating Revenues
- ------------------------
Other operating revenues consist principally of third-party service
revenue realized by certain of the Company's service departments, including the
Production Technology and Machine Building Division and Central Analytical
Laboratory, and changes in estimates of revenues recognized on certain customers
and contracts.
Other Non-operating Income
- --------------------------
Other non-operating income-net consists of rental income and gains and
losses on sale of fixed assets.
NOTE B - Product Sales, Royalties, Revenues from Product Development
- --------------------------------------------------------------------
Agreements and License and other Agreements
-------------------------------------------
The Company has product sales and business agreements with third parties
for which royalties and revenues are included in the consolidated statements of
operations. A summary of all of the Company's revenues follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Product Sales:
Negative and positive electrodes $ 3,116,106 $ 9,295,574 $ 10,832,282
Battery packs 1,059,769 414,469 2,333,276
Machine building 348,363 148,300 1,731,586
------------ ------------ -----------
$ 4,524,238 $ 9,858,343 $ 14,897,144
============ ============ ============
Royalties:
Battery technology $ 2,681,778 $ 2,479,319 $ 1,258,633
Optical Memory 53,844 6,662 136,239
------------ ------------ -----------
$ 2,735,622 $ 2,485,981 $ 1,394,872
============ ============ ===========
Revenues from product development agreements:
Photovoltaics $ 2,927,982 $ 2,156,080 $ 1,168,718
Battery technology 11,602,269 10,668,813 2,660,342
Optical Memory 2,472,230 1,357,128 824,892
Hydrogen 191,231 585,103 679,174
Other 46,903 544,292 405,751
------------ ------------ -----------
$ 17,240,615 $ 15,311,416 $ 5,738,877
============ ============ ===========
License and other agreements:
Battery $ 4,663,995 $ 1,701,134 $ 4,448,004
Optical Memory/Microelectronics 90,000 -- 1,380,644
------------ ------------ -----------
$ 4,753,995 $ 1,701,134 $ 5,828,648
============ ============ ===========
</TABLE>
-52-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development
- --------------------------------------------------------------------
Agreements and License and other Agreements - (Continued)
---------------------------------------------------------
In October 1998, the Company entered into a cooperative venture agreement
and a patent license agreement with Sanyo. Sanyo has been granted a nonexclusive
license under Ovonic Battery patents, which includes the right to sublicense
Sanyo affiliates.
The license agreement provided for an up-front payment of $4,400,000 and
advance royalties of $500,000. Sanyo also purchased a minority common share
position in Ovonic Battery for $2,970,000. A gain on the sale of Ovonic Battery
stock in the amount of $1,970,000 was recorded for the year ended June 30, 1999
and the remaining gain of $1,000,000 has been deferred.
During the year ended June 30, 1999, the Company signed two license
agreements. Under one agreement, the Company granted a nonexclusive license to
Ricoh Company Limited of Tokyo, Japan ("Ricoh"), the world's largest
manufacturer of rewritable compact disks. In addition to the currently produced
rewritable compact disk media, this royalty-bearing license covers all past and
future phase-change optical memory products, including rewritable DVD Media,
produced by Ricoh.
In addition to the obligation of Ricoh to pay running royalties on future
sales of phase-change optical memory products, ECD received a nonrefundable
payment of $90,000 for the release of any past claims of ECD against Ricoh.
The second agreement is a license agreement with Japan Storage Battery
Co., Ltd. ("Japan Storage"), a Japanese battery manufacturing company. The
Company granted a royalty-bearing, non-exclusive license to Japan Storage. In
consideration for the granting of this license, the Company received a
nonrefundable payment of $100,000 and running royalties. In addition, upon the
attainment of a certain level of sales by Japan Storage, the Company will
receive a further nonrefundable payment of $500,000 ($100,000 of which will be
applied as an advance royalty payment).
The Company historically has entered into agreements with a relatively
small number of major customers throughout the world. There are two major
customers which represent a total of 63% (18% for GM Ovonic and 45% for General
Motors) of total revenue for the year ended June 30, 1999. There are three major
customers which represent a total of 62% of total revenue for the year ended
June 30, 1998 (24% for General Motors, 15% for GM Ovonic and 23% for GP
Batteries International Limited ("GP Batteries"). There are two major customers
which represent a total of 56% of total revenue for the year ended June 30,
1997 (26% for GM Ovonic and 30% for GP Batteries). All of the Company's major
customers are Ovonic Battery customers.
-53-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE B - Product Sales, Royalties, Revenues from Product Development
- --------------------------------------------------------------------
Agreements and License and other Agreements - (Continued)
---------------------------------------------------------
The following table presents revenues by country based on the location of
the customer:
Year Ended June 30,
----------------------------------------
1999 1998 1997
------ ------ ------
United States $24,879,683 $21,506,018 $12,448,157
Japan 6,701,664 2,204,355 7,612,310
Hong Kong 783,822 7,465,908 8,788,324
Other countries 607,127 381,300 729,683
----------- ----------- -----------
$32,972,296 $31,557,581 $29,578,474
=========== =========== ===========
NOTE C - Nonrefundable Advance Royalties
- ----------------------------------------
At June 30, 1999 and 1998 the Company deferred recognition of revenue
relating to nonrefundable advance royalty payments. Nonrefundable advance
royalties consist of the following:
June 30,
--------------------------
1999 1998
----------- -----------
Battery $ 1,792,068 $ 1,338,802
Optical Memory 2,090,035 2,095,318
----------- -----------
$ 3,882,103 $ 3,434,120
=========== ===========
During the years ended June 30, 1999, 1998 and 1997, $52,017, $257,366
and $62,743, respectively, of creditable royalties earned were recognized as
revenue. During the year ended June 30, 1999, a nonrefundable advance royalty
of $500,000 was received from Sanyo. There are no obligations in connection
with any of the advance royalty agreements which require the Company to incur
any additional costs.
NOTE D - Joint Ventures and Investments
- ---------------------------------------
Joint Ventures
- --------------
The Company's investments in its joint ventures, other than United Solar,
are recorded at zero. The Company will continue to carry its investment in each
of these joint ventures at zero until the venture becomes profitable (based upon
the venture's history of sustainable profits), at which time the Company will
start to recognize over a period of
-54-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments - (Continued)
- -----------------------------------------------------
years its share, if any, of the then equity of each of the ventures, and will
recognize its share of each venture's profits or losses on the equity method
of accounting.
ECD has invested $5,000,000 in United Solar through June 30, 1999 and,
therefore, its investment is recorded at the amount of cash directly invested
adjusted for the net earnings or losses for each respective period. ECD will
suspend recognition of net earnings or losses should the calculated investment
go below zero or above $5,000,000. ECD will continue to carry its investment in
United Solar at an amount no higher than its cash investment until it becomes
profitable (based upon its history of sustainable profits), at which time ECD
will start to recognize over a period of years its share, if any, of the then
equity of United Solar, and will recognize its share of United Solar's profits
or losses on the equity method of accounting.
Based upon the opinion of legal counsel, the Company believes that it has
no obligation to fund any losses that its joint ventures incur beyond the
Company's investment. Additionally, the Company has no financial or other
guarantees with respect to liabilities incurred by its joint ventures.
United Solar
GAAP requires ECD to carry its pre-May 1998 investments in United Solar
(as well as ECD's other joint ventures) at zero, notwithstanding ECD's
contributions to United Solar of licenses in the field of photovoltaic and other
property and equipment in exchange for ECD's 49.98% interest in United Solar and
notwithstanding Canon's investments of $55,000,000. In May 1998, ECD and Canon
each invested $2,500,000 in United Solar to fund United Solar's continuing
operations. In the year ended June 30, 1999, the Company loaned United Solar
$2,500,000. This loan is convertible, at ECD's option, into additional shares of
United Solar stock.
GAAP requires that ECD's cash investments, (including loans and advances),
regardless of the true value of United Solar, be recorded on the balance sheet
as the value of ECD's investment in United Solar. At the same time, however,
GAAP requires that ECD make non-cash adjustments to its carrying value of United
Solar such that ECD's non-cash carrying value of United Solar is decreased by
the losses of United Solar (in proportion to ECD's ownership share of United
Solar) and ECD is required to record a non-cash, non-operating expense in the
amount of the non-cash reduction in the carrying value of United Solar.
The investment in United Solar will continue to be carried at an amount no
higher than ECD's total cash investments ($5,000,000 at June 30, 1999) until
United Solar
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<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments - (Continued)
- -----------------------------------------------------
becomes profitable (based upon its history of sustainable profits), at which
time ECD will start to recognize over a period of years its share, if any,
of the then equity of United Solar, and will recognize its share of United
Solar's profits or losses on the equity method of accounting.
In 1997, Canon entered into an agreement with United Solar whereby, in
consideration of an $11.5 million payment to United Solar, Canon, in addition to
its exclusive rights to manufacture photovoltaic products in Japan, has been
permitted to expand its rights to manufacture photovoltaic products on a
nonexclusive basis in Australia and one country of Europe as determined by
Canon. In addition, ECD received a $500,000 fee from Canon in connection with
this agreement and recorded this fee as revenues from license and other agree-
ments.
ECD performed laboratory, shop, patent and research services for the
benefit of United Solar for which ECD received approximately $79,000, $315,000
and $144,000 in the years ended 1999, 1998 and 1997, respectively. These amounts
are included in other revenues. In addition, in the years ended June 30, 1999,
1998 and 1997, United Solar billed ECD for approximately $437,000, $180,000 and
$296,000, respectively, for work performed in accordance with U.S. Government
contracts.
The following sets forth certain financial data regarding United Solar
that are derived from United Solar's financial statements.
UNITED SOLAR STATEMENTS OF OPERATIONS
Six Months
Ended June 30, Year Ended December 31,
-------------- -----------------------------
1999 1998 1997
-------------- ------------ ------------
(Unaudited)
Revenues $ 6,513,271 $10,540,830 $ 9,661,402
Operating Expenses
Cost of sales 6,479,200 12,366,009 14,158,315
Product development 1,675,777 2,777,544 2,789,524
General and administrative 521,168 1,663,578 1,533,295
Sales and marketing 476,607 1,460,242 1,785,465
------------ ------------ ------------
Total 9,152,752 18,267,373 20,266,599
------------ ------------ ------------
Other Income (Expense) (438,155) (1,031,372) 10,785,471*
------------ ------------ ------------
Net Income (Loss) $(3,077,636) $(8,757,915) $ 180,274
============ ============ ============
*Includes royalty income of $11,500,000.
-56-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments - (Continued)
- -----------------------------------------------------
UNITED SOLAR BALANCE SHEETS
---------------------------
June 30, December 31,
------------ --------------
1999 1998
------------ --------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 210,314 $ 335,224
Accounts Receivable 3,025,485 1,872,266
Inventory 2,629,643 3,807,819
Other Current Assets 358,350 392,674
------------ ------------
Total Current Assets 6,223,792 6,407,983
Property, Plant and Equipment (Net) 9,465,050 10,428,243
Other Assets 219,351 219,773
------------ ------------
Total Assets $15,908,193 $17,055,999
============ ============
Current Liabilities:
Accounts Payable and Accrued Expenses $ 4,197,061 $ 3,761,229
Note Payable-ECD 2,500,000 --
------------ ------------
Total Current Liabilities 6,697,061 3,761,229
Note Payable-Canon 2,500,000 2,500,000
Lease Payable 6,908,033 7,914,036
Total Stockholders' Equity (196,901) 2,880,734
------------ ------------
Total Liabilities and Stockholders' Equity $15,908,193 $17,055,999
============ ============
GM Ovonic
In June 1994, Ovonic Battery and General Motors formed a joint venture, GM
Ovonic, for the manufacture and commercialization of Ovonic NiMH batteries for
electric vehicles. General Motors has a 60% interest and Ovonic Battery has a
40% interest in this joint venture. Ovonic Battery has contributed intellectual
property, licenses, production processes, know-how, personnel and engineering
services pertaining to Ovonic NiMH battery technology to the joint venture. The
contribution of General Motors consists of operating capital, plant, equipment
and management personnel necessary for the volume production of batteries.
In October 1995, the Company received a $3,710,000 order, as amended, from
GM Ovonic for battery manufacturing equipment. In the years ended June 30, 1998
and 1997, ECD recognized revenue of $133,000 and $1,448,000, respectively, under
this order.
During the years ended June 30, 1999, 1998 and 1997, the Company had
revenues, including the aforementioned machine-building revenues, of $5,924,000,
$4,871,000 and $7,776,000, respectively, related to sales of products to GM
Ovonic and for reimbursement of services performed for GM Ovonic.
-57-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments - (Continued)
- -----------------------------------------------------
There are no financial statements currently available for GM Ovonic. GM
Ovonic is in its developmental stage and, as such, has a history of operating
losses.
Investments in EV Global, Unique Mobility and Unique Europa
In February 1998, the Company and EV Global, a Lee Iacocca company,
entered into a Stock Purchase Agreement ("Agreement") which provided for the
transfer to EV Global of 146,924 shares of ECD's Common Stock and warrants to
purchase 133,658 shares of ECD's Common Stock. The Agreement also provided for
the transfer to ECD of 250,000 shares of EV Global Common Stock and 129,241
shares of Unique Mobility common stock. The warrants are exercisable prior to
February 2, 2003, with 73,462 shares exercisable at $13.6125 and 60,196 shares
exercisable at $16.6125.
On May 10, 1999, ECD, Unique Mobility and EV Global formed the German
private company Unique Europa to manufacture battery-electric, hybrid-electric
and fuel cell-electric vehicles. Unique Europa is headquartered in Mittweida,
near Leipzig, in the Free State of Saxony, Germany.
Unique Europa has been initially capitalized with a minor amount of cash
and a contribution of 625,000 shares of Unique Mobility common stock. Of the
stock contribution, 208,333 shares (79,092 of which were acquired from EV Global
in exchange for 34,723 shares of ECD) were contributed by each of ECD and Unique
Mobility, 118,750 shares by EV Global and 89,584 shares by Haco Trading Ltd.
("HACO"), an investment fund. As a result of the initial capitalization,
ownership of share interests in Unique Europa are presently as follows: 33.6
percent for Unique Mobility; 33.2 percent for ECD; 19.0 percent for EV Global;
and 14.2 percent for HACO.
There are no financial statements currently available for Unique Europa.
Sovlux
In 1990, ECD formed Sovlux, a joint venture to manufacture the Company's
photovoltaic products in the countries of the former Soviet Union. Sovlux is
owned 50% by ECD and 50% by the State Research and Production Enterprise Kvant
and enterprises of the Russian Ministry of Atomic Energy ("Minatom"). Sovlux
has not been able to continue production of photovoltaic products due to
current economic conditions in Russia.
In 1998, ECD formed Sovlux Battery to produce NiMH batteries and
components for sale to Ovonic Battery and its licensees. Sovlux Battery is
owned 50% by ECD and
-58-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE D - Joint Ventures and Investments - (Continued)
- -----------------------------------------------------
50% by the Chepetsky Mechanical Plant ("Chepetsky"), an enterprise of Minatom.
ECD's contribution to the ventures consists solely of technology.
There are no financial statements currently available for Sovlux or Sovlux
Battery. Sovlux and Sovlux Battery are in their developmental stage and, as
such, have a history of operating losses.
In 1998, the Company recorded revenues of $1,500,000 for license fees
relating to a technology transfer agreement with Sovlux Battery and Chepetsky.
NOTE E - Long-Term Liabilities and Line of Credit
- -------------------------------------------------
A summary of the Company's long-term liabilities is as follows:
June 30,
--------------------------
1999 1998
----------- -----------
Financing Lease for headquarters building
with interest at 8.2% and monthly
payments of $19,250 $ 132,172 $ 344,419
Capitalized leases with Finova
(with interest rates of approximately 12%
at June 30, 1999 and 12% at June 30, 1998) 3,789,416 4,799,551
Other capitalized leases 52,856 142,746
Other 15,000 --
----------- -----------
Total 3,989,444 5,286,716
Less amounts included in current liabilities 1,309,508 1,319,220
----------- -----------
Total Long-Term Liabilities $ 2,679,936 $ 3,967,496
=========== ===========
Financing Lease
- ---------------
In 1990, ECD entered into a 10-year financing lease transaction relating
to certain buildings and land. The terms of the transaction included an option
for ECD to purchase the buildings and land in the sixth year of the lease for
$2,150,000, increasing 5% each year thereafter. The Company has not exercised
the option.
Capitalized Leases
- ------------------
In April 1998, the Company entered into a $6,000,000 capital lease
transaction with Finova Capital Corporation, which has two components. One
component, which has been fully utilized, provided $2,000,000 to refinance
existing leased equipment, (resulting in $1,200,000 net cash to the Company) and
has a three-year term at the expiration of which the Company will be required
to purchase the equipment for 10% of the original cost. The second component
provides for up to $4,000,000 of financing through December 31, 1998 for the
Company's sale and leaseback of equipment it acquired subsequent to June 30,
1996. At the expiration of the related five-year lease, the Company will be
required to purchase the leased equipment for 10% of the original
-59-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E - Long-Term Liabilities and Line of Credit - (Continued)
- ---------------------------------------------------------------
cost. At June 30, 1998, the Company had entered into sale-and-leaseback
arrangements of $3,137,000 in connection with the second component. The unused
portion of the second component has expired.
The lease agreement is secured by Ovonic Battery's plant and equipment. In
addition, ECD has guaranteed Ovonic Battery's obligations under this agreement
and has provided a first security interest in the Company's unencumbered plant
and equipment.
Other
- -----
The Company has operating lease agreements, principally for office and
research facilities and equipment. These leases, in some instances, include
renewal provisions at the option of the Company. Rent expense under such lease
agreements for the years ended June 30, 1999, 1998 and 1997 was approximately
$699,000, $1,361,000 and $1,685,000, respectively.
Future minimum payments on obligations under capital leases and
noncancellable operating leases expiring in each of the five years subsequent to
June 30, 1999 are as follows:
Capital Leases Operating Leases
-------------- ----------------
2000 $ 1,566,698 $ 654,717
2001 1,557,761 190,515
2002 777,478 --
2003 709,762 --
2004 -- --
----------- -----------
TOTAL $ 4,611,699 $ 845,232
===========
Less interest & taxes included above 769,427
-----------
Present value of minimum payments $ 3,842,272
===========
-60-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E - Long-Term Liabilities and Line of Credit - (Continued)
- ---------------------------------------------------------------
Line of Credit
- --------------
In April 1999, the Company entered into a two-year financing agreement
with Standard Federal Bank for a line of credit of up to $3,000,000. This
financing bears an interest rate of prime, is secured by a first interest in
the Company's accounts receivable and inventory and contains certain financial
covenants relating to the Company's tangible net worth, working capital and
total debt to tangible net worth. The Company has not borrowed under this
financing agreement.
NOTE F - Capital Stock
- ----------------------
The voting rights of ECD's three classes of stock are as follows:
Class A Convertible Common Stock - 25 votes per share
Class B Convertible Common Stock - one vote per share
Common Stock - one vote per share
The Class A Convertible Common Stock is automatically convertible into
Common Stock on a share-for-share basis on September 30, 2005 and is convertible
at the option of the holder any time prior to that date.
As part of an employment agreement among ECD, Ovonic Battery and Mr.
Ovshinsky, ECD granted Mr. Ovshinsky the right to vote the shares of Ovonic
Battery held by ECD following a change in control of ECD. For purposes of this
agreement, change in control means (i) any sale, lease, exchange or other
transfer of all or substantially all of ECD's assets; (ii) the approval by ECD
stockholders of any plan or proposal of liquidation or dissolution of ECD; (iii)
the consummation of any consolidation or merger of ECD in which ECD is not the
surviving or continuing corporation; (iv) the acquisition by any person of 30%
or more of the combined voting power of the then outstanding securities having
the right to vote for the election of directors; (v) changes in the constitution
of the majority of the Board of Directors; (vi) the holders of the Class A
Common Stock ceasing to be entitled to exercise their preferential voting rights
other than as provided in ECD's charter and (vii) bankruptcy. In the event of
mental or physical disability or death of Mr. Ovshinsky, the foregoing power of
attorney and proxy shall be exercised by Mr. Ovshinsky's wife, Dr. Iris
Ovshinsky, a Vice President of ECD. The initial term of the employment agreement
was six years. In February 1999, the Board of Directors of the Company renewed
each of Mr. Ovshinsky's employment agreements for an additional term ending
September 30, 2005.
As part of an Executive Employment Agreement between ECD and Mr. Stempel
dated January 15, 1999 (the "Employment Agreement"), ECD issued to Mr. Stempel
430,000 shares of its Common Stock, $.01 par value, for $4,300, representing an
amount equal to the aggregate par value of the Common Stock. ECD recorded
compensation
-61-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE F - Capital Stock - (Continued)
- ------------------------------------
expense of $340,200 in the year ended June 30, 1999 in connection
with this transaction. Also as part of the Employment Agreement, ECD submitted
a proposal to its stockholders at its annual meeting of stockholders held on
March 25, 1999 that ECD's Certificate of Incorporation be amended to increase
ECD's authorized capital stock from 20,500,000 to 20,930,000 shares and to
authorize 430,000 shares of a new Class B Common Stock, par value $.01. Upon
approval of the proposal by the stockholders, Mr. Stempel surrendered to ECD the
shares of Common Stock issued for an equal number of shares of Class B Common
Stock ("Class B Common Stock"). After the conversion of the Class A Common Stock
into Common Stock, the Class B Common Stock will be entitled to 25 votes per
share.
The Class B Common Stock is automatically convertible into Common Stock on
a share-for-share basis on September 30, 2005.
During the years ended June 30, 1999, 1998 and 1997, ECD issued 5,000,
3,564 and 3,040 shares of restricted common stock, respectively, as compensation
to employees, consultants, contractors and directors. ECD recorded compensation
expense, based upon fair market value of these shares at the date of issuance,
for the years ended June 30, 1999, 1998 and 1997 of $40,000, $45,000, and
$119,000, respectively, relating to these restricted shares of Common Stock.
NOTE G - Options and Warrants to Purchase Stock
- -----------------------------------------------
The Company has Common Stock reserved for issuance as follows:
<TABLE>
<CAPTION>
Number of Shares
----------------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Conversion of Class A Convertible Common Stock 219,913 219,913
Conversion of Class B Convertible Common Stock 430,000 --
Stock options 3,327,590 3,207,177
1999 Private Placement Warrants 165,307 174,966
Warrants issued in connection with services rendered 285,000 285,000
Warrants issued to EV Global 133,658 133,658
Warrants issued in connection with public offering of units 1,750,000 1,750,000
Convertible Investment Certificates 5,773 6,021
--------- ---------
TOTAL RESERVED SHARES 6,317,241 5,776,735
========= =========
</TABLE>
Stock Option Plans
- ------------------
The Company's 1976 Amended and Restated Stock Option Plan (the "Amended
Plan") which expired in November 1996, the 1987 Stock Option and Incentive Plan
("1987 Stock Option Plan"), which expired in December 1997, and the 1995
Non-Qualified Stock Option Plan ("1995 Stock Option Plan") authorize the
granting of stock options at such
-62-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Options and Warrants to Purchase Stock - (Continued)
- -------------------------------------------------------------
exercise prices and to such employees, consultants and other persons as the
Compensation Committee appointed by the Board of Directors (the "Compensation
Committee") shall determine. All three stock option plans are administered by
the Compensation Committee.
Options under the Amended Plan and the 1987 Stock Option Plan expire six
years from the date of grant. Options under the 1995 Stock Option Plan expire no
later than 10 years from the date of grant. Stock options under all three plans
may not be exercised during the first six months of the grant. Thereafter,
options may be exercised cumulatively each year, starting at the end of six
months after grant of the option, at a predetermined rate of the number of
shares of the Common Stock subject to the option. The exercise price of all
options granted has been equal to the fair market value of the Common Stock at
the time of grant.
The purchase price and number of shares covered by the options are subject
to adjustment under certain circumstances to protect the optionholders against
dilution.
A summary of the transactions during the years ended June 30, 1999, 1998
and 1997 with respect to the Company's Amended Plan, 1987 Stock Option Plan and
1995 Stock Option Plan follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding July 1 2,269,413 $12.97 2,327,606 $12.82 2,129,856 $12.24
Granted 185,000 $10.19 19,453 15.71 291,030 14.93
Exercised 161,482 $ 7.01 61,866 7.73 90,420 5.99
Canceled 38,238 $12.93 15,780 15.10 2,860 15.74
--------- ------ --------- ------ --------- ------
Outstanding June 30 2,254,693 $13.17 2,269,413 12.97 2,327,606 $12.82
========= ====== ========= ====== ========= ======
Exercisable June 30 2,060,993 $13.44 2,135,933 $12.76 1,705,546 $12.19
========= ====== ========= ====== ========= ======
</TABLE>
-63-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Options and Warrants to Purchase Stock - (Continued)
- -------------------------------------------------------------
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices As of 6/30/99 Contractual Life Price As of 6/30/99 Price
- -------------------- ------------- ---------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 7.75 - $10.19 219,700 8.30 $ 9.81 34,700 $ 7.77
$10.50 - $11.75 498,745 1.41 $11.70 493,345 $11.72
$11.88 - $11.88 793,973 5.65 $11.88 793,973 $11.88
$15.13 - $15.88 505,405 6.72 $15.48 502,105 $15.48
$16.75 - $23.50 236,870 6.20 $18.74 236,870 $18.74
--------- ---- ------ --------- ------
$ 7.75 - $23.50 2,254,693 5.27 $13.17 2,060,993 $13.44
</TABLE>
In November 1993, stock options to purchase 94,367 shares of Common Stock
held by Stanford R. Ovshinsky, and stock options to purchase 49,630 shares of
Common Stock held by Dr. Iris M. Ovshinsky, issued under the aforementioned
Amended Plan, were canceled and new stock options, covering 150,000 (adjusted to
259,619 as of June 30, 1999) shares of Common Stock in the case of Mr. Ovshinsky
and 100,000 shares (adjusted to 172,828 as of June 30, 1999) of Common Stock in
the case of Dr. Ovshinsky, were granted by ECD. The stock options canceled had
an average exercise price of approximately $18.00 per share. The weighted
average exercise price of the outstanding stock options is $10.17 per share.
The number of stock options are adjusted pursuant tothe antidilution provisions
of the stock option grants. The weighted average price was arrived at based
upon (i) the option price of $7.00 per share for the original number of shares
and any additional shares as adjusted for the antidilution provisions during
the 18-month period following the grant; and (ii) thereafter, the fair market
value of any additional shares as adjusted for the antidilution provisions,
determined quarterly.
On January 15, 1999, ECD entered into a Stock Option Agreement with
Robert C. Stempel that granted Mr. Stempel an option to purchase up to 300,000
shares of Common Stock at an exercise price of $10.688 per share, the fair
market value of the Common Stock as of the date of the Stock Option Agreement.
The option, which is not subject to vesting requirements, may be exercised from
time to time, in whole or in part, commencing as of the date of the Stock Option
Agreement and ending on the tenth anniversary of such date.
The Company continues to apply APB 25 to its stock-based compensation
awards to employees instead of adopting SFAS 123. Had compensation cost for the
Company's
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<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - Options and Warrants to Purchase Stock - (Continued)
- -------------------------------------------------------------
stock option plans been determined based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed under
SFAS 123, the Company's net loss and loss per share for the year ended June 30,
1999 would have been increased by approximately $1,972,000 and $.15 per share.
The Company's net loss and loss per share for the years ended June 30, 1998 and
1997 would have been increased by approximately $1,268,000 and $.11 per share
and $1,840,000 and $.17 per share, respectively. The fair value of the options
granted during 1999, 1998 and 1997 is estimated as $2,139,000, $349,000,
and $1,710,000 on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
1999 1998 1997
------ ------ ------
Dividend Yield 0% 0% 0%
Volatility % 70.27% 59.77% 57.96%
Risk Free Interest Rate 4.87% 5.74% 6.26%
Expected Life 4.08 years 3.91 years 3.54 years
Warrants
- --------
ECD has outstanding warrants for the purchase of 165,307 shares of Common
Stock in connection with private placements of Common Stock as well as warrants
to purchase 215,000 shares of Common Stock in connection with services rendered.
The warrants are currently exercisable at a weighted average price of $12.65 per
share. The exercise price of certain of the warrants may be reduced in the
future pursuant to certain antidilution provisions.
ECD also had outstanding warrants for the purchase of 133,658 shares of
Common Stock issued to EV Global pursuant to a Stock Purchase Agreement between
EV Global and ECD entered into in February 1998. These warrants are exercisable
on or prior to February 2, 2003, with 73,462 shares exercisable at $13.6125 per
share and 60,196 shares exercisable at $16.6125 per share.
In connection with the 1998 limited public offering of units, ECD has
outstanding warrants for the purchase of 1,750,000 shares of Common Stock. These
warrants, trading on the NASDAQ National Market under the symbol ENER, are
exercisable at $17.89 on or prior to January 31, 2000, and for $20.54 at any
time thereafter on or prior to July 31, 2001.
NOTE H - Net Income Loss Per Share
- ----------------------------------
Basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding. The Company used the
-65-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE H - Net Income Loss Per Share - (Continued)
- ------------------------------------------------
treasury stock method to calculate diluted earnings per share. Potential
dilution exists from stock options and warrants. Weighted average number of
shares outstanding and basic and diluted earnings per share for the three years
ended June 30 are computed as follows:
1999 1998 1997
---------- ---------- ----------
Weighted average number of
shares outstanding 13,019,657 11,116,619 10,729,802
Net loss $(13,777,589) $(16,664,999) $(17,954,612)
BASIC NET LOSS PER SHARE $ (1.06) $ (1.50) $ (1.67)
============= ============= =============
Weighted average number of
shares outstanding 13,019,657 11,116,619 10,729,802
Weighted average shares for
dilutive securities -0- -0- -0-
------------- ------------- ------------
Average number of shares
outstanding and potential
dilutive shares 13,019,657 11,116,619 10,729,802
Net loss $(13,777,589) $(16,664,999) $(17,954,612)
DILUTED NET LOSS PER SHARE $ (1.06) $ (1.50) $ (1.67)
============= ============= =============
Due to the Company's net losses, 1999, 1998 and 1997 weighted average
shares of potential dilutive securities of 101,898, 450,639 and 705,056,
respectively, were excluded from the calculations of diluted loss per share, as
inclusion of these securities would have been antidilutive to the net loss per
share. Additional securities of 3,840,852, 2,014,649 and 335,430, respectively,
were excluded from the 1999, 1998 and 1997 calculation of weighted average
shares of potential dilutive securities. Because of the relationship between the
exercise prices and the average market price of ECD's Common Stock during these
periods, these securities would have been antidilutive regardless of the
Company's net loss.
NOTE I - Federal Taxes on Income
- --------------------------------
At June 30, 1999 and 1998, the Company has approximately $43,316,000 and
$42,935,000, respectively, of net deferred tax assets, consisting primarily of
$42,304,000 and $41,681,000, respectively, due to net operating loss
carryforwards, and $1,012,000 and $1,254,000, respectively, due to tax credit
carryforwards. However, a valuation reserve of the same amount is required due
to the Company's operating history and uncertainty regarding the future
realizability of the net tax operating loss carryforwards and tax credit
carryforwards.
-66-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE I - Federal Taxes on Income - (Continued)
- ----------------------------------------------
The Company's valuation reserve was increased by $381,000 in 1999,
$2,712,000 in 1998 and by $4,584,000 in 1997 for the impact of the 1999, 1998
and 1997 net operating losses, temporary differences and the expiration of tax
carryforwards.
At June 30, 1999, the Company's remaining net tax operating loss
carryforwards and tax credit carryforwards expire as follows:
Net Tax Operating Investment Tax R & D Credit
Loss Carryforward Credit Total Carryforward
----------------- -------------- ------------
2000 $ 8,767,000 $172,000 $813,000
2001 23,828,000 27,000
2002 15,900,000
2003 17,460,000
2004 1,378,000
2005 --
2006 7,075,000
2007 2,854,000
2008 1,802,000
2009 4,304,000
2010 --
2011 5,430,000
2012 15,749,000
2013 12,649,000
2014 7,229,000
----------- -------- --------
$124,425,000 $199,000 $813,000
============ ======== ========
NOTE J - Related Party Transactions
- -----------------------------------
For the three years ended June 30, 1999, 1998 and 1997, ECD incurred
expenses of $63,331, $107,881 and $146,000, respectively, for services rendered
by its directors.
For related party transactions involving United Solar, GM Ovonic and
Sovlux see Note D.
-67-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE K - Business Segments
- --------------------------
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. This Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company has completed its
analysis of this Statement and its impact on disclosures and has prepared the
information in the table below in accordance with SFAS 131. The Company adopted
the provisions of this statement in fiscal 1999. Adoption of this Statement did
not have a material impact on the Company's financial statements.
The Company has two business segments; its subsidiary, Ovonic Battery, and
the parent company, ECD. Ovonic Battery is primarily involved in developing and
commercializing battery technology. ECD is primarily involved in photovoltaics,
microelectronics and machine building. General corporate expenses (except for
those expenses allocated to Ovonic Battery), interest expense and interest
income are classified in the ECD business segment.
-68-
<PAGE>
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE K - Business Segments - (Continued)
- ----------------------------------------
The Company's operations by business segment were as follows:
Financial Data by Business Segment
(in thousands)
Ovonic Battery ECD Consolidated
-------------- ---------- ------------
Revenues*
Year ended June 30, 1999 $25,687 $7,285 $32,972
Year ended June 30, 1998 27,161 4,397 31,558
Year ended June 30, 1997 24,183 5,395 29,578
Interest Income
Year ended June 30, 1999 $ -- $1,187 $1,187
Year ended June 30, 1998 11 588 599
Year ended June 30, 1997 -- 1,308 1,308
Interest Expense**
Year ended June 30, 1999 $525 $39 $564
Year ended June 30, 1998 62 76 138
Year ended June 30, 1997 219 165 384
Operating Loss***
Year ended June 30, 1999 $(9,785) $(3,209) $(12,994)
Year ended June 30, 1998 (14,462) (2,383) (16,845)
Year ended June 30, 1997 (12,610) (6,418) (19,028)
Equity in Net Loss of Investee
under Equity Method
Year ended June 30, 1999 $ -- $(3,660) $(3,660)
Year ended June 30, 1998 -- (384) (384)
Year ended June 30, 1997 -- -- --
Depreciation and Amortization Expense
Year ended June 30, 1999 $1,247 $728 $1,975
Year ended June 30, 1998 1,307 823 2,130
Year ended June 30, 1997 1,065 1,248 2,313
Capital Expenditures
Year ended June 30, 1999 $800 $522 $1,322
Year ended June 30, 1998 1,357 345 1,702
Year ended June 30, 1997 2,807 770 3,577
Identifiable Assets
Year ended June 30, 1999** $13,012 $26,796 $39,808
Year ended June 30, 1998** 16,340 35,021 51,361
Year ended June 30, 1997 18,643 19,086 37,729
* All revenues are derived from external customers.
** Excluding intercompany interest.
***Includes intercompany interest of $3,565 for the year ended June 30, 1999,
$3,444 for the year ended June 30, 1998 and $2,124 for the year ended June
30, 1997 charged by ECD to Ovonic Battery in accordance with the agreements
between the parties.
-69-
<PAGE>
Item 9: Changes in and Disagreements on Accounting and Financial Disclosure
- ------ -------------------------------------------------------------------
Not applicable.
-70-
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
The composition of the Board of Directors of the Company is as follows:
<TABLE>
<CAPTION>
Director of
the Company Principal Occupation and
Name Since Office Business Experience
- -------------------------------- ----------- ------------------- ------------------------------------------------------
<S> <C> <C> <C>
Stanford R. Ovshinsky 1960 President, Chief Mr. Ovshinsky, 76, the founder and Chief
Executive Officer Executive Officer of the Company, has been an
and Director executive officer and director of the Company
since its inception in 1960. Mr. Ovshinsky is the
primary inventor of the Company's technology. Mr.
Ovshinsky also serves as the Chief Executive
Officer and director of Ovonic Battery; President,
Chief Executive Officer and director of United
Solar; a member of the Board of Managers of GM
Ovonic; Chairman of Ovonyx, and Co-Chairman of
the Board of Directors of Sovlux. Mr. Ovshinsky is
the husband of Dr. Iris M. Ovshinsky.
Iris M. Ovshinsky 1960 Vice President Dr. Ovshinsky, 72, co-founder and Vice President
and Director of the Company, has been an executive officer
and director of the Company since its inception in
1960. Dr. Ovshinsky also serves as a director of
Ovonic Battery. Dr. Ovshinsky is the wife of
Stanford R. Ovshinsky.
Robert C. Stempel 1995 Chairman of the Mr. Stempel, 66, is Chairman of the Board and
Board, Executive Executive Director of the Company. Prior to his
Director and election as a director in December 1995, Mr.
Director Stempel served as senior business and technical
advisor to Mr. Ovshinsky. He is also the Chairman
of Ovonic Battery and serves on the Board of
Managers of GM Ovonic. From 1990 until his
retirement in 1992, he was the Chairman and
Chief Executive Officer of General Motors
Corporation. Prior to serving as Chairman, he had
been President since 1987. Mr. Stempel serves
on the Audit Committee of the Board.
Kenneth R. Baker 1999 Vice Chairman Mr. Baker, 52, prior to joining the Company in
and Director February 1999 as its Vice Chairman, held a variety
of positions with General Motors Corporation from
1985-1999, including Vice President and General
Manager of GM's Distributed Energy Business
Unit (1998-1999); Vice President, GM R&D (1993-
1998); Program Manager, GM Electric Vehicles
(1990-1993). Mr. Baker is a director of
AeroVironment, Inc.
</TABLE>
-71-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Nancy M. Bacon 1977 Senior Vice Mrs. Bacon, 53, joined the Company in 1976 as its
President Vice President of Finance and Treasurer. She
and Director became the Senior Vice President of the Company
in 1993. Mrs. Bacon also serves as a director
of Sovlux and United Solar.
Umberto Colombo 1995 Director Prof. Colombo, 71, is Chairman of the Scientific
Councils of the ENI Enrico Mattei Foundation and
of the Instituto Per l'Ambiente in Italy. He was
Chairman of the Italian National Agency for New
Technology, Energy and the Environment until
1993 and then served as Minister of Universities
and Scientific and Technological Research in the
Italian Government until 1994. Prof. Colombo is a
member of the Board of Directors of several
Italian-based public companies. He is also active
as a consultant in international science and
technology policy institutions related to economic
growth.
Hellmut Fritzsche 1969 Vice President Dr. Fritzsche, 72, was a professor of Physics at
and Director the University of Chicago from 1957 until his
retirement in 1996. He was also Chairman of the
Department of Physics, the University of Chicago,
until 1986. Dr. Fritzsche has been a Vice
President of the Company since 1965, acting on a
part-time basis, chiefly in the Company's research
and product development activities.
Joichi Ito 1995 Director Mr. Ito, 33, is the Chairman and a Director of
Digital Garage, K.K. and Infoseek Japan K.K. He
is also the President of Neoteny and Transoceanic
Ventures, Inc., as well as a board member of
PSINet Japan, K.K. He is an expert on new
computer technology and networked information
systems and writes and lectures extensively in the
United States, Japan and Europe. Mr. Ito serves
as a director and consultant to many companies in
the field of information technology.
Seymour Liebman 1997 Director Mr. Liebman, 50, currently Executive Vice
President and General Counsel at Canon U.S.A.,
Inc., has held a variety of positions with Canon
since 1974, including Senior Vice President and
General Counsel from 1992-1996. Mr. Liebman
also serves on the Board of Directors of United
Solar. He is a director of Zygo Corporation.
-72-
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Tyler Lowrey 1999 Vice President Mr. Lowrey, 46, prior to joining the Company in
and Director January 1999 as a Vice President, held a variety
of positions with Micron Technology Inc. ("Micron")
from 1984-1997, including Vice Chairman, Chief
Technology Officer, Chief Operating Officer and
Vice President, R&D. While at Micron, Mr. Lowrey
was responsible for DRAM, SRAM, Flash and RFID
product development as well as heading up all
manufacturing operations, DRAM design, QA and
R&D Process Fab. Mr. Lowrey is also a director of
Ovonyx as well as its President and Chief Executive
Officer.
Walter J. McCarthy, Jr. 1995 Director Mr. McCarthy, 74, until his retirement in 1990, was
the Chairman and Chief Executive Officer of
Detroit Edison Company. He has served as a
consultant to the Company since 1990. Until
1995, Mr. McCarthy also served on the Boards of
Comerica Bank, Detroit Edison Company and
Federal-Mogul Corporation. He is a member of the
National Academy of Engineering. Mr. McCarthy
serves as Chairman of the Compensation
Committee and on the Audit Committee of the
Board.
Florence I. Metz 1995 Director Dr. Metz, 70, until her retirement in 1996, held
various executive positions with Inland Steel
Company: General Manager, New Ventures,
Inland Steel Company (1989-1991); General
Manager, New Ventures, Inland Steel Industries
(1991-1992) and Advanced Graphite Technologies
(1992-1993); Program Manager for Business and
Strategic Planning at Inland Steel (1993-1996).
Dr. Metz also serves on the Board of Directors of
Ovonic Battery. She serves on the Compensation
Committee of the Board.
Nathan J. Robfogel 1990 Director Mr. Robfogel, 64, was, until his retirement in 1996,
a partner with the law firm of Harter, Secrest &
Emery, which he joined in 1959. Mr. Robfogel is
currently Vice President for University Relations of
the Rochester Institute of Technology where he
was a trustee from 1985-1996. He is a member of
the Board of Directors of Genesee Valley Trust
Company and Rochester Community Baseball,
Inc. From 1989 to 1995, Mr. Robfogel served as
Chairman of the Board and Chief Executive Officer
of the New York State Facilities Development
Corporation, a public benefit corporation.
Stanley K. Stynes 1977 Director Dr. Stynes, 67, was Dean of the College of
Engineering at Wayne State University from 1970
to August 1985, and a Professor of Engineering at
Wayne State University from 1985 until his
retirement in 1992. He has been involved in
various administrative, teaching, research and
related activities. Dr. Stynes serves as Chairman
of the Audit Committee of the Board.
</TABLE>
-73-
<PAGE>
The executive officers of the Company are as follows:
<TABLE>
<S> <C> <C> <C>
Name Age Office Served As An Executive
Officer or Director Since
- --------------------- --- ---------------------------------- -------------------------
Stanford R. Ovshinsky 76 President, Chief Executive Officer 1960(1)
and Director
Iris M. Ovshinsky 72 Vice President and Director 1960(1)
Robert C. Stempel 66 Executive Director and Chairman of 1995
the Board
Kenneth R. Baker 52 Chief Operating Officer and Vice 1999
Chairman of the Board
Nancy M. Bacon 53 Senior Vice President and Director 1976
Hellmut Fritzsche 72 Vice President and Director 1969
Tyler Lowrey 46 Vice President and Director 1999
Subhash K. Dhar 48 President and Chief Operating 1986
Officer of Ovonic Battery
Stephan W. Zumsteg 53 Treasurer 1997
</TABLE>
- ------------------
(1) The predecessor of the Company was originally founded in 1960. The
present corporation was incorporated in 1964 and is the successor by
merger of the predecessor corporation.
See above for information relating to Stanford R. Ovshinsky, Iris M.
Ovshinsky, Robert C. Stempel, Kenneth R. Baker, Nancy M. Bacon, Hellmut
Fritzsche and Tyler Lowrey.
Subhash K. Dhar joined the Company in 1981 and has held various positions
with Ovonic Battery since its inception in October 1982. Mr. Dhar has served as
Chief Operating Officer of Ovonic Battery since 1986 and President since 1987.
Stephan W. Zumsteg joined the Company in March 1997 and was elected
Treasurer in April 1997. Prior to joining the Company, Mr. Zumsteg was Chief
Financial Officer of the Kirlin Company from July 1996 to February 1997 and
Vice President-Finance & Administration and Chief Financial Officer of Lincoln
Brass Works from July 1991 to June 1996.
-74-
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and officers to file reports of ownership and changes in
ownership with respect to the securities of the Company and its affiliates with
the Securities and Exchange Commission and to furnish copies of these reports
to the Company. Based on a review of these reports and written representations
from the Company's directors and officers regarding the necessity of filing a
report, the Company believes that during fiscal year ended June 30, 1999, all
filing requirements were met on a timely basis.
-75-
<PAGE>
Item 11: Executive Compensation
- ------- ----------------------
The following tables set forth the compensation paid by the Company during
its last three fiscal years to its Chief Executive Officer and each of its other
four most highly compensated executive officers for the fiscal year ended June
30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
------------ ------------
<S> <C> <C> <C> <C> <C> <C>
All
Restricted Options Other
Name and Principal Fiscal Stock (Number of Compen-
Position Year(1) Salary(2) Bonus Award Shares) sation(3)
- ------------------ ------- --------- ----- ----- ---------- ---------
Stanford R. Ovshinsky, 1999 $294,929 -- $14,952
President and Chief 1998 $284,967 -- $14,652
Executive Officer 1997 $276,016 $37,981(4) $10,017
Robert C. Stempel, 1999 $270,004 $4,591,540(5) 300,000 $ 6,111
Executive Director 1998 $270,005 -- -- $ 3,159
1997 $270,005 -- 25,000 $ 3,159
Iris M. Ovshinsky, 1999 $257,941 $14,952
Vice President 1998 $250,016 $13,569
1997 $250,016 $ 8,939
Nancy M. Bacon, 1999 $254,854 $ 7,104
Senior Vice President 1998 $235,019 $ 5,796
1997 $235,019 $ 5,796
Kenneth R. Baker, 1999 $100,968 100,000
Chief Operating Officer(6)
</TABLE>
- ---------------
(1) The Company's fiscal year is July 1 to June 30. The Company's 1999 fiscal
year ended June 30, 1999.
(2) Amounts shown include compensation deferred under the Company's 401 (k)
Plan. Does not include taxable income resulting from exercise of stock
options.
-76-
<PAGE>
(3) "All Other Compensation" is comprised of (i) contributions made by the
Company to the accounts of each of the named executive officers under the
Company's 401(k) Plan with respect to each of the calendar years ended
December 31, 1998, 1997 and 1996, respectively, as follows: Mr. Ovshinsky
$4,800 (1998) and $4,500 (1997); Dr. Ovshinsky $4,800, $4,500 and $3,269;
Mrs. Bacon $4,800 (1998) and $4,500 (for each of 1997 and 1996); (ii) the
dollar value of any life insurance premiums paid by the Company in the
calendar years ended December 31, 1998, 1997 and 1996, respectively, with
respect to term-life insurance for the benefit of each of the named
executives as follows: Mr. Ovshinsky $10,152 (for each of 1998 and 1997)
and $10,017 (1996); Mr. Stempel $6,111 (1998) and $3,159 (for each of 1997
and 1996); Dr. Ovshinsky $10,152, $9,069 and $5,670; Mrs. Bacon $2,304
(1998) and $1,296 (for each of 1997 and 1996). Under the 401 (k) Plan,
which is a qualified defined-contribution plan, the Company makes
matching contributions periodically on behalf of the participants in the
amount of 50% of each such participant's contributions. These matching
contributions were limited to 3% of a participant's salary, up to $150,000
for 1996 and up to $160,000 for 1997 and 1998.
(4) Computed based on net income from operations for preceding years as
provided in Mr. Ovshinsky's September 1993 Employment Agreement. See
"Employment Agreements."
(5) Represents the market value, less consideration paid consisting of
the par value $.01, of 430,000 shares of Common Stock awarded to
Mr. Stempel under a Restricted Stock Agreement dated January 15, 1999.
Such shares of Common Stock were exchanged for an equal number of shares
of Class B Common Stock upon the approval by the Company's stockholders,
at the Annual Meeting held on March 25, 1999, of a proposal to amend the
Company's Certificate of Incorporation to authorize 430,000 shares of a
new Class B Common Stock. See "Class B Common Stock." All shares of
Restricted Stock will be deemed to vest if Mr. Stempel is serving as a
director and officer of the Company on September 30, 2005 or upon the
occurrence of a change in control of the Company. Dividends will be paid
on the Restricted Stock if and to the extent paid on the Company's Common
Stock generally. So long as Mr. Stempel continues to serve as a director
of the Company and irrespective of whether the shares are deemed vested,
he will be entitled to exercise all voting rights with respect to the
Restricted Stock, including all preferential voting rights to which the
Class B Common Stock may become entitled after the conversion of the Class
A Common Stock. The value of Mr. Stempel's Restricted Stock at the close
of the Company's fiscal year was $4,273,340.
(6) Mr. Baker joined the Company in February 1999. The salary reported for
1999 is for the five-month period February 1999 - June 1999.
-77-
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all options granted to the named executive
officers during the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(1)
-------------------------------------------------- -----------------------------
% of Total
Options
Options Granted Exercise
Granted to Employees Price Expiration
Name (#) in Fiscal Year ($/Sh) Date 0% 5% 10%
- ------------------ ---------- -------------- ----------- ------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert C. Stempel 300,000(2) 61.86% $10.688 1/15/2009 _ $2,016,487 $5,110,175
Kenneth R. Baker 100,000 20.62% $10.188 3/24/2009 _ $640,717 $1,623,704
</TABLE>
- ------------
(1) The potential realizable value amounts shown illustrate the values that
might be realized upon exercise immediately prior to the expiration of
their term using 5% and 10% appreciation rates as required to be used in
this table by the Securities and Exchange Commission, compounded annually,
and are not intended to forecast possible future appreciation, if any, of
the Company's stock price. Additionally, these values do not take into
consideration the provisions of the options providing for
nontransferability or termination of the options following termination of
employment.
(2) On January 15, 1999, the Company entered into a Stock Option Agreement
(the "Stock Option Agreement") with Mr. Stempel, pursuant to which the
Company granted Mr. Stempel an option to purchase up to 300,000 shares of
Common Stock at an exercise price of $10.688 per share, the fair market
value of the Common Stock as of the date of the Stock Option Agreement.
The option granted to Mr. Stempel may be exercised from time to time in
whole or in part commencing as of the date of the Stock Option Agreement
and ending on the tenth anniversary of such date. The option is not
subject to vesting requirements and may be exercised by Mr. Stempel prior
to or after the termination of his service as an executive officer and
director of the Company.
-78-
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table sets forth all stock options exercised by the named
executives during the fiscal year ended June 30, 1999 and the number and value
of unexercised options held by the named executive officers at fiscal year end.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised in-the-Money Options
Exercise Realized Options at Fiscal Year End at Fiscal Year End
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------ ----------- --------- --------------------------- -------------------------
<S> <C> <C> <C> <C>
Stanford R. Ovshinsky(1) _ _ 554,576/0 $491,027/$0
Iris M. Ovshinsky (2) _ _ 354,716/0 $326,618/$0
Robert C. Stempel (3) _ _ 638,000/0 $19,692/$0
Kenneth R. Baker(4) _ _ 0/100,000 $0/$0
Nancy M. Bacon(5)(6) 40,000 $94,965 185,200/0 $0/$0
</TABLE>
- --------------
(1) Mr. Ovshinsky's exercisable options are exercisable at a weighted average
price of $11.057 per share.
(2) Dr. Ovshinsky's exercisable options are exercisable at a weighted average
price of $11.03 per share.
(3) Mr. Stempel's exercisable options are exercisable at a weighted average
price of $12.76 per share.
(4) Mr. Baker's unexercisable options are exercisable at a weighted average
price of $10.188 per share.
(5) Mrs. Bacon's exercisable options are exercisable at a weighted average
price of $12.97 per share.
(6) Of the $94,965 value realized, approximately $34,383 was used to cover
withholding taxes and other expenses associated with the exercise, and
$33,750 was used to purchase 5,000 shares of the Company Common Stock.
EMPLOYMENT AGREEMENTS
On September 2, 1993, Stanford R. Ovshinsky entered into separate
employment agreements with each of the Company and Ovonic Battery in order to
define clearly his duties and compensation arrangements and to provide to each
company the benefits of his management efforts and future inventions. The
initial term of each employment agreement was six years. In February 1999, the
Board of Directors of the Company and Ovonic Battery renewed each of Mr.
Ovshinsky's employment agreements for an additional term ending September 30,
2005. Mr. Ovshinsky's employment agreement with the Company provides for an
annual salary of not less than $100,000, while his agreement with Ovonic
Battery provides for an annual salary of not less than $150,000. Both agreements
provide for annual increases to reflect increases in the cost of living,
-79-
<PAGE>
discretionary annual increases as determined by the Board of Directors of the
Company and an annual bonus equal to 1% of the net income from operations of the
Company (excluding Ovonic Battery) or Ovonic Battery. Mr. Ovshinsky's annual
salary increases over the last three fiscal years have been determined based
upon increases in the cost of living as determined by the Compensation Committee
using as a guide the percentage increase in the Consumer Price Index for the
Detroit-metropolitan area published by the Bureau of Labor Statistics.
Mr. Ovshinsky's employment agreement with Ovonic Battery additionally
contains a power of attorney and proxy from the Company providing Mr. Ovshinsky
with the right to vote the shares of Ovonic Battery held by the Company
following a change in control of the Company. For purposes of the agreement,
change in control means (i) any sale, lease, exchange or other transfer of all
or substantially all of the Company's assets; (ii) the approval by the Company's
stockholders of any plan or proposal of liquidation or dissolution of the
Company; (iii) the consummation of any consolidation or merger of the Company in
which the Company is not the surviving or continuing corporation; (iv) the
acquisition by any person of 30 percent or more of the combined voting power of
the then outstanding securities having the right to vote for the election of
directors; (v) changes in the constitution of the majority of the Board of
Directors; (vi) the holders of the Class A Common Stock ceasing to be entitled
to exercise their preferential voting rights other than as provided in the
Company's charter and (vii) bankruptcy. In the event of mental or physical
disability or death of Mr. Ovshinsky, the foregoing power of attorney and
proxy will be exercised by Dr. Iris M. Ovshinsky.
Pursuant to his employment agreement with Ovonic Battery, Mr. Ovshinsky
was granted stock options, exercisable at a price of $16,129 per share to
purchase 186 shares (adjusted from a price of $50,000 per share to purchase 60
shares pursuant to the anti-dilution provisions of the option agreement) of
Ovonic Battery's common stock, representing approximately 6 percent of Ovonic
Battery's outstanding common stock. The Ovonic Battery stock options vest on a
quarterly basis over six years commencing with the quarter beginning October 1,
1993, subject to Mr. Ovshinsky's continued performance of his obligations to
Ovonic Battery under his employment agreement.
In February 1998, the Compensation Committee of the Board of Directors
recommended and the Board of Directors approved an Employment Agreement between
the Company and Dr. Iris M. Ovshinsky. The purpose of the Employment Agreement
is to clearly define Dr. Ovshinsky's duties and compensation arrangements. The
Employment Agreement also provides for the Company to have the benefits of Dr.
Ovshinsky's services as a consultant to the Company following the termination
of her active employment for consulting fees equal to 50 percent of the salary
payable to Dr. Ovshinsky at the date of the termination of her active
employment. Dr. Ovshinsky shall have the right to retire at any time during
her services as a consultant and receive retirement benefits equal to the
consulting fees for the remainder of Dr. Ovshinsky's life.
The initial term of Dr. Ovshinsky's employment period was until September
2, 1999 and is automatically renewed for successive one-year periods unless
terminated by Dr.
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<PAGE>
Ovshinsky or the Company upon 120 days notice in advance of the renewal date.
Dr. Ovshinsky's employment agreement provides for an annual salary of not less
than $250,000, annual increases to reflect increases in the cost of living and
discretionary annual increases, as determined by the Board of Directors of the
Company.
On January 15, 1999, the Company entered into an Executive Employment
Agreement (the "Executive Employment Agreement") with Mr. Stempel. The Executive
Employment Agreement provides that Mr. Stempel will serve as the Executive
Director of the Company for a term ending September 30, 2005. During the term
of his employment, Mr. Stempel will be entitled to receive an annual salary as
determined by the Board of Directors from time to time. The Executive Employment
Agreement also provides for discretionary bonuses to be determined by the Board
of Directors based on Mr. Stempel's individual performance and the financial
performance of the Company. The Executive Employment Agreement also requires the
Company to provide Mr. Stempel with non-wage benefits, including insurance,
pension and profit sharing, stock options, automobile use or allowance and
organizational membership fees, of the types provided generally by the Company
to its senior executive officers.
The Executive Employment Agreement permits Mr. Stempel to retire as an
officer and employee of the Company and will permit him to resign his employment
at any time in the event he becomes subject to any mental or physical disability
which, in the good faith determination of Mr. Stempel, materially impairs his
ability to perform his regular duties as an officer of the Company. The
Executive Employment Agreement permits the Company to terminate Mr. Stempel's
employment upon the occurrence of certain defined events, including the material
breach by Mr. Stempel of certain non-competition and confidentiality covenants
contained in the Executive Employment Agreement, his conviction of certain
criminal acts or his gross dereliction or malfeasance of his duties as an
officer and employee of the Company (other than as a result of his death or
mental or physical disability).
Mr. Stempel's entitlement to compensation and benefits under the Executive
Employment Agreement will generally cease effective upon the date of the
termination of his employment, except that the Company will be required to
continue to provide Mr. Stempel and his spouse with medical, disability and life
insurance coverage for the remainder of their lives or until the date they
secure comparable coverage provided by another employer.
COMPENSATION COMMITTEE REPORT
Compensation Committee.
The Compensation Committee is composed of Mr. McCarthy (Chairman) and Dr.
Metz. Neither of the Compensation Committee members are or were during the
last fiscal year an officer or employee of the Company or any of its
subsidiaries, or had any business relationship with the Company or any of its
subsidiaries.
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<PAGE>
The Compensation Committee is responsible for administering the policies
which govern both annual compensation of executive officers and the Company's
stock option plans. The Compensation Committee meets several times during the
year to review recommendations from management regarding stock options and
compensation. Compensation and stock option recommendations are based upon
performance, current compensation, stock option ownership, and years of service
to the Company. The Company does not have a formal bonus program for
executives, although it has awarded bonuses to its executives from time to time.
Compensation of Executive Officers.
The Compensation Committee considers the Company's financial position and
other factors in determining the compensation of its executive officers. These
factors include remaining competitive within the relevant hiring market--whether
scientific, managerial or otherwise--so as to enable the Company to attract and
retain high quality employees, and, where appropriate, linking a component of
compensation to the performance of the Company's Common Stock--such as by a
granting of stock option or similar equity-based compensation--to instill
ownership thinking and align the employees' and stockholders' objectives. The
Company has been successful at recruiting and retaining and motivating
executives who are highly talented, performance-focused and entrepreneurial.
During the Company's last fiscal year, the Compensation Committee
determined that the Company had achieved several important scientific and
business milestones. The Compensation Committee also concluded that the
achievement of these milestones had not yet been fully reflected in the
Company's financial results. In light of the Company's general policy of
conserving available cash flow where possible to advance its business
objectives, the Compensation Committee determined that it was not advisable to
materially raise executive base salaries or grant material bonuses, stock
options or other compensation to the Company's executive officers.
Chief Executive Officer Compensation.
In September 1993, Mr. Ovshinsky entered into separate employment
agreements with each of the Company and Ovonic Battery. The purpose of these
agreements, which provide for the payment to Mr. Ovshinsky of an annual salary
of not less than $250,000 by the Company and by Ovonic Battery, was to define
clearly Mr. Ovshinsky's duties and compensation arrangements and to provide to
each company the benefits of his management efforts and future inventions.
See "Employment Agreements." Mr. Ovshinsky's compensation for fiscal year
1999 was determined in accordance with his Employment Agreements with the
Company and Ovonic Battery. Based on the factors described above with
respect to the compensation of the Company's executive officers, the
Compensation Committee determined that it was not advisable to pay a
discretionary bonus to the Company's Chief Executive Officer during 1999.
COMPENSATION COMMITTEE
Walter J. McCarthy, Jr.
Florence I. Metz
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<PAGE>
PERFORMANCE GRAPH
The line graph below compares the cumulative total stockholder return on
the Company's Common Stock over a five-year period with the return on the
NASDAQ Stock Market - US Index and the Hambrecht & Quist Technology Index.
Cumulative Total Return
----------------------------------------
6/94 6/95 6/96 6/97 6/98 6/99
---- ---- ---- ---- ---- ----
ENERGY CONVERSION DEVICES, INC. 100 133 186 104 79 81
NASDAQ STOCK MARKET (U.S.) 100 133 171 208 274 393
HAMBRECHT & QUIST TECHNOLOGY 100 177 207 270 342 554
The total return with respect to NASDAQ Stock Market - US Index and the
Hambrecht & Quist Technology Index assumes that $100 was invested on June 30,
1994, including reinvestment of dividends.
ECD has paid no cash dividends in the past and no cash dividends are
expected to be paid in the foreseeable future.
The Report of the Compensation Committee on Executive Compensation and the
Performance Graph are not deemed to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, or Securities Exchange
Act of 1934, as amended, or incorporated by reference in any documents so filed.
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<PAGE>
Item 12: Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
CLASS A COMMON STOCK
Mr. Stanford R. Ovshinsky and his wife, Dr. Iris M. Ovshinsky (executive
officers, Directors and founders of the Company), own of record 153,420 shares
and 65,601 shares, respectively (or approximately 69.8% and 29.8%,
respectively), of the outstanding shares of Class A Common Stock. Such shares
are owned directly or indirectly through certain trusts of which Mr. and Dr.
Ovshinsky are co-trustees. Common Stock is entitled to one vote per share and
each share of Class A Common Stock is entitled to 25 votes per share. Class A
Common Stock is convertible into Common Stock on a share-for-share basis at any
time and from time to time at the option of the holders, and will be deemed to
be converted into Common Stock on a share-for-share basis on September 30, 2005.
At the Company's Annual Meeting held on March 25, 1999, the Company's
stockholders approved a proposal to amend the Company's Certificate of
Incorporation changing the date on which shares of Class A Common Stock are
deemed to be converted into shares of Common Stock from September 14, 1999 to
September 30, 2005. Under applicable Delaware law, the September 30, 2005
mandatory conversion date may be extended in the future from time to time with
approval of the Company's stockholders voting together as a single class.
As of September 24, 1999, Mr. Ovshinsky also had the right to vote 126,500
shares of Common Stock (the "Sanoh Shares") owned by Sanoh Industrial Co., Ltd.
("Sanoh") under the terms of an agreement dated as of November 3, 1992 between
the Company and Sanoh which, together with the Class A Common Stock and 11,489
shares of Common Stock Mr. and Dr. Ovshinsky own, give Mr. and Dr. Ovshinsky
voting control over shares representing approximately 30.08% of the combined
voting power of the Company's outstanding stock.
The following table sets forth, as of September 24, 1999, information
concerning the beneficial ownership of Class A Common Stock by each Director and
all executive officers
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<PAGE>
and Directors of the Company as a group. All shares are owned directly except
as otherwise indicated. Under the rules of the Securities and Exchange
Commission, Stanford R. Ovshinsky and Iris M. Ovshinsky may each be considered
to beneficially own the shares held by the other.
<TABLE>
<CAPTION>
Class A
Name of Common Stock Total Number of Shares
Beneficial Owner Beneficially Owned(1)(2) Beneficially Owned Percentage of Class
- ---------------------- ------------------------ ---------------------- -------------------
<S> <C> <C> <C>
Stanford R. Ovshinsky 153,420 153,420 69.8%
Iris M. Ovshinsky 65,601 65,601 29.8%
All other executive
officers and directors as
a group (14 persons) __ __ __
Total 219,021 219,021 99.6%
- ----------------
</TABLE>
(1) The balance of the 219,913 shares of Class A Common Stock outstanding, 892
shares, or approximately 0.4%, are owned by other members of Mr. and Dr.
Ovshinsky's family. Neither Mr. nor Dr. Ovshinsky has voting or investment
power with respect to such shares.
(2) On November 10, 1995, the Compensation Committee recommended, and the Board
of Directors approved, an amendment to Mr. and Dr. Ovshinsky's Stock Option
Agreements dated November 18, 1993 (the "Agreements") to permit Mr. and Dr.
Ovshinsky to exercise a portion (126,082 and 84,055 shares, respectively)
of their existing Common Stock option for Class A Common Stock on the same
terms and conditions as provided in the Agreements. The shares of Class A
Common Stock issuable upon exercise of the options under the Agreements, as
amended, are not included in the number of shares indicated.
CLASS B COMMON STOCK
At the Company's Annual Meeting held on March 25, 1999, the Company's
stockholders approved a proposal to increase the Company's authorized capital
stock and to authorize 430,000 shares of a new Class B Common Stock. All of the
authorized shares of Class B Common Stock were awarded to Mr. Robert C. Stempel
pursuant to the terms of a Restricted Stock Agreement dated as of January 15,
1999 between the Company and Mr. Stempel.
The terms of the Class B Common Stock are substantially similar to those
of the Company's Class A Common Stock. The principal difference between the
Class A Common Stock and the Class B Common Stock is with respect to voting
rights. Each share of Class B Common Stock will initially entitle the holder to
one vote on all matters to be voted upon by the Company's stockholders. However,
each share of Class B Common Stock will become entitled to 25 votes as of the
first date upon which all of the outstanding shares of Class A Common Stock have
been converted into Common Stock and no shares of Class A Common Stock are
outstanding. The preferential voting rights of the Class B Common Stock, if
triggered, will expire on September 30, 2005.
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<PAGE>
The Class B Common Stock will be convertible into Common Stock on a
share-for-share basis at any time at the option of the holder. In addition, the
Class B Common Stock will be deemed to be converted into Common Stock on
September 30, 2005. The Company's amended Certificate of Incorporation provides
that the foregoing September 30, 2005 mandatory conversion date may be extended
in the future with the approval of the Company's stockholders voting together as
a single class.
COMMON STOCK
Directors and Executive Officers. The following table sets forth, as of
September 24, 1999, information concerning the beneficial ownership of Common
Stock by each director and executive officer and for all directors and executive
officers of the Company as a group. All shares are owned directly except as
otherwise indicated.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership(1) % of Class(2)
- ------------------------ ----------------------- -------------
Robert C. Stempel 1,128,404(3) 8.10%
Stanford R. Ovshinsky 844,986(4) 6.23%
Iris M. Ovshinsky 422,816(5) 3.19%
Nancy M. Bacon 213,715(6) 1.64%
Subhash K. Dhar 68,928(7) *
Kenneth R. Baker 41,000(8) *
Hellmut Fritzsche 31,490(9) *
Walter J. McCarthy, Jr. 22,681(10) *
Stanley K. Stynes 21,378(11) *
Umberto Colombo 12,645(12) *
Nathan J. Robfogel 12,611(13) *
Florence I. Metz 11,378(14) *
Seymour Liebman 11,021(15) *
Stephan W. Zumsteg 10,000(16) *
Joichi Ito 8,554(17) *
Tyler Lowrey 5,000(18) *
All executive officers and directors
as a group (16 persons) 2,866,607 18.56%
- ------------------
* Less than 1%.
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<PAGE>
(1) Under the rules and regulations of the Securities and Exchange
Commission, a person is deemed to be the beneficial owner of a security
if that person has the right to acquire beneficial ownership of such
security within sixty days, whether through the exercise of options or
warrants or through the conversion of another security.
(2) Under the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock issuable upon exercise of options
and warrants or upon conversion of securities which are deemed to be
beneficially owned by the holder thereof (see Note (1) above) are deemed
to be outstanding for the purpose of computing the percentage of
outstanding securities of the class owned by such person but are not
deemed to be outstanding for the purpose of computing the percentage of
the class owned by any other person.
(3) Includes 430,000 shares of Class B Common Stock, 638,000 shares
represented by options exercisable within 60 days and 14,000 shares
represented by warrants exercisable within 60 days.
(4) Includes 554,576 shares (adjusted as of June 30, 1999) represented by
options exercisable within 60 days, the 126,500 Sanoh Shares over which
Mr. Ovshinsky has voting power, 153,420 shares of Class A Common Stock
which are convertible into Common Stock, and 750 shares represented by
warrants exercisable within 60 days. Under the rules and regulations of
the Securities and Exchange Commission, Mr. Ovshinsky may be deemed a
beneficial owner of the shares of Common Stock and Class A Common Stock
owned by his wife, Iris M. Ovshinsky. Such shares are not reflected in
Mr. Ovshinsky's share ownership in this table.
(5) Includes 354,716 shares (adjusted as of June 30, 1999) represented by
options exercisable within 60 days, 65,601 shares of Class A Common
Stock which are convertible into Common Stock and 750 shares represented
by warrants exercisable within 60 days. Under the rules and regulations
of the Securities and Exchange Commission, Dr. Ovshinsky may be deemed a
beneficial owner of the shares of Common Stock and Class A Common Stock
owned by her husband, Stanford R. Ovshinsky. Such shares are not
reflected in Dr. Ovshinsky's share ownership in this table.
(6) Includes 185,200 shares represented by options exercisable within 60
days and 6,000 shares represented by warrants exercisable within 60
days.
(7) Includes 68,928 shares represented by options exercisable within 60
days.
(8) Includes 40,000 shares represented by options exercisable within 60
days.
(9) Includes 18,980 shares represented by options exercisable within 60
days and 1,980 shares represented by warrants exercisable within 60
days.
(10) Includes 10,000 shares represented by options exercisable within 60
days.
(11) Includes 9,000 shares represented by options exercisable within 60 days.
(12) Includes 10,000 shares represented by options exercisable within 60
days.
(13) Includes 10,000 shares represented by options exercisable within 60
days.
(14) Includes 5,000 shares represented by options exercisable within 60 days.
(15) Includes 10,000 shares represented by options exercisable within 60
days.
(16) Includes 8,000 shares represented by options exercisable within 60 days.
(17) Includes 6,743 shares represented by options exercisable within 60 days.
(18) Includes 4,000 shares represented by options exercisable within 60 days.
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<PAGE>
Principal Shareholders. The following table sets forth, as of September
24, 1999, to the knowledge of the Company, the beneficial holders of more than
5% of the Company's Common Stock (see footnotes for calculation used to
determine "percentage of class" category):
Name and Address of Amount and Nature of
Beneficial Holder Beneficial Ownership Percentage of Class
---------------------- -------------------- -------------------
Stanford R. and Iris M. Ovshinsky 1,267,802(1) 9.42%(2)(3)
1675 West Maple Road
Troy, Michigan 48084
Robert C. Stempel 1,128,404(4) 8.10%(2)
1675 West Maple Road
Troy, Michigan 48084
FMR Corp. 1,020,000(5) 7.9%
82 Devonshire St.
Boston, MA 02109
T. Rowe Price Associates, Inc. 801,700(6) 6.1%
100 E. Pratt Street
Baltimore, MD 21202
- -----------------------
(1) Includes 219,021 shares of Class A Common Stock owned by Mr. and Dr.
Ovshinsky (which shares are convertible at any time into Common Stock and
will be deemed to be converted into Common Stock on September 30, 2005),
11,489 shares of Common Stock owned by Mr. and Dr. Ovshinsky, 126,500
shares of Sanoh Shares over which Mr. Ovshinsky has voting rights, 909,292
(adjusted as of June 30, 1999) shares represented by options exercisable
within 60 days and 1,500 shares represented by warrants exercisable within
60 days held by Mr. and Dr. Ovshinsky.
(2) Under the rules and regulations of the Securities and Exchange Commission,
shares of Common Stock issuable upon exercise of options and warrants or
upon conversion of securities which are deemed to be beneficially owned by
the holder thereof are deemed to be outstanding for the purpose of
computing the percentage of outstanding securities of the class owned by
such person but are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person.
(3) Represents the sum of Mr. and Dr. Ovshinsky's respective ownership
interests calculated separately.
(4) Includes 430,000 shares of Class B Common Stock owned by Mr. Stempel
(which shares are convertible at any time into Common Stock and will be
deemed to be converted into Common Stock on September, 30, 2005) 46,404
shares of Common Stock, 638,000 shares represented by options exercisable
within 60 days and 14,000 shares represented by warrants exercisable
within 60 days.
(5) Based upon information contained in Schedule 13G dated February 1, 1999,
Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. and an investment adviser, is the beneficial
owner of 1,020,000 shares or 7.9% of the Common Stock outstanding of the
Company as a result of acting as investment adviser to various investment
companies. The number of shares of Common Stock of the Company owned by
the investment companies on December 31, 1998 included 400,000 shares of
Common Stock resulting from the assumed conversion of 400,000 of the
Company's Warrants. Edward C. Johnson 3d, FMR Corp., through its
control of Fidelity, and the funds each has sole power to dispose of the
1,020,000 shares owned by the Funds. Neither FMR
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<PAGE>
Corp. nor Edward C. Johnson 3d, chairman of FMR Corp, has sole power to
vote or direct the voting of the shares owned directly by the Fidelity
Funds, which power resides with the Funds' Boards of Trustees. Fidelity
carries out the voting of the shares under written guidelines established
by the Funds' Boards of Directors.
(6) Based upon information contained in Schedule 13G dated February 12, 1999,
T. Rowe Price Associates, Inc. ("Price Associates") has indicated that
these securities are owned by various individual and institutional
investors, including T. Rowe Price New Horizons Fund, Inc., which owns
800,000 shares representing 6.1% of the shares outstanding which Price
Associates serves as investment adviser with power to direct investments
and/or sole power to vote the securities. For purposes of the reporting
requirements of the Securities Exchange Act of 1934, Price Associates is
deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, the beneficial owner
of such securities.
Item 13: Certain Relationships and Related Transactions
------- ----------------------------------------------
Herbert Ovshinsky, Stanford R. Ovshinsky's brother, is employed by the
Company as Director of the Production Technology and Machine Building Division
working principally in the design of manufacturing equipment. He received
$122,398 in salary during the year ended June 30, 1999.
HKO Media, Inc., owned by Harvey Ovshinsky, Stanford R. Ovshinsky's son,
performed video production services on behalf of the Company. HKO Media, Inc.
was paid $69,947 by the Company for its services during the fiscal year ended
June 30, 1999.
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<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Report on Form 8-K
- ------- --------------------------------------------------------------
<TABLE>
<S> <C>
(a) 1. Financial statements
See Part II.
Page
----
2. Financial Statement Schedules
The following is included in Part II, Item 8:
Independent Auditors' Report................................. 37
Other financial statements and financial statement schedules are omitted
(1) because of the absence of the conditions under which they are
required or (2) because the information called for is shown in the
financial statements and notes thereto.
</TABLE>
3. Exhibits (including those incorporated by reference)
<TABLE>
<CAPTION>
Page or
Reference
---------
<S> <C>
3.1 Restated Certificate of Incorporation filed September 29, 1967 (a)
3.2 Certificate of Amendment to Certificate of Incorporation filed (b)
February 24, 1998, increasing authorized shares of the Company's
Common Stock from 15,000,000 shares to 20,000,000 shares
3.3 Certificate of Amendment to Certificate of Incorporation filed 102
March 25, 1999 extending voting rights of the Company's Class A
Common Stock, increasing the authorized capital stock of the
Company's Common Stock to 20,930,000 shares, and authorizing
430,000 shares of Class B Common Stock
3.4 Bylaws in effect as of July 17, 1997 (c)
3.5 Amendment to Article VIII of the Bylaws effective as of January 7, 106
1999
4.1 Agreement among the Company, Stanford R. Ovshinsky and Iris M. (d)
Ovshinsky relating to the automatic conversion of Class A
Common Stock into the Company's Common Stock upon the occurrence
of certain events, dated September 15, 1964
10.1 Patent License Agreement between the Company and Hitachi, Ltd. (e)
dated October 29, 1984
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.2 Patent License Agreement dated September 10, 1985 between the (f)
Company and Sony Corporation relating to optical memory
technology
10.3 License Agreement effective as of June 18, 1985 between the (g)
Company and Canon Inc., as restated on September 20, 1985
10.4 Non-Assertion Agreement dated June 16, 1986 between the (h)
Company and Canon Inc.
10.5 Amendment to the Patent License Agreement dated December 5, 1986 (i)
between the Company and Matsushita Electric Industrial Co., Ltd.
10.6 License Agreement and Supplemental Understanding dated (j)
February 10, 1989 between Varta Batterie AG and the Company
and Ovonic Battery Company
10.7 Charter of the Soviet-American Joint Venture, Sovlux, dated (k)
January 11, 1990
10.8 Agreement on the Establishment and Activity of the Soviet- (l)
American Joint Venture, Sovlux, dated January 11, 1990
10.9 License and Joint R&D Agreement entered into as of February 20, (m)
1990 by and between Hitachi Maxell, Ltd., the Company and Ovonic
Battery Company, Inc.
10.10 Joint Venture Agreement dated as of June 27, 1990 by and between (n)
Canon Inc. and the Company filed confidentially pursuant to
Rule 24b-2
10.11 Exclusive License Agreement dated July 6, 1990 made by and (o)
between the Company and United Solar Systems Corp. filed
confidentially pursuant to Rule 24b-2
10.12 Know-How Cross-License Agreement dated July 6, 1990 made by (p)
and between Canon Inc., the Company and United Solar Systems
Corp. filed confidentially pursuant to Rule 24b-2
10.13 Option License Agreement dated July 6, 1990 made by and (q)
between the Company and Canon Inc. filed confidentially pursuant
to Rule 24b-2
10.14 Option License Agreement dated July 6, 1990 made by and (r)
between the Company and United Solar Systems Corp. filed
confidentially pursuant to Rule 24b-2
10.15 Amended Master Agreement made and entered into by and (s)
between the Company and Matsushita Electric Industrial Co., Ltd.
dated January 24, 1991
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.16 Memory Patent License Agreement made and entered into by and (t)
between the Company and Matsushita Electric Industrial Co., Ltd.
dated January 24, 1991
10.17 Memory Patent License Agreement by and between the Company (u)
and Asahi Chemical Industry Co., Ltd. dated April 26, 1991
10.18 License Agreement by and between the Company, Ovonic Battery (v)
and Samsung Electronics Co., Ltd. dated June 10, 1991
10.19 License Agreement between the Company, Ovonic Battery and (w)
Sylva Industries Limited dated June 14, 1991
10.20 License Agreement by and between the Company and Ovonic (x)
Battery and Harding Energy Systems, Inc. dated August 28, 1991
10.21 License Agreement made as of November 20, 1991 by and between (y)
the Company, Ovonic Battery and Hyundai Motor Company
10.22 Memory Patent License Agreement effective as of April 1, 1992 (z)
by and between the Company and Plasmon Limited
10.23 Option License Agreement effective as of September 8, 1992 by (aa)
and between the Company, Ovonic Battery and Sylva Industries
Limited
10.24 Memory Patent License Agreement dated as of February 3, 1993 (bb)
between the Company and Toshiba Corporation
10.25 Amendment to Exclusive License Agreement dated as of July 22, (cc)
1993 between the Company and United Solar Systems Corp. filed
confidentially pursuant to Rule 24b-2
10.26 License Agreement dated as of July 22, 1993 between the (dd)
Company and United Solar System Corp. filed confidentially
pursuant to Rule 24b-2
10.27 Amendment to Option License Agreement dated as of July 22, 1993 (ee)
between the Company and United Solar Systems Corp.
10.28 License Agreement between the Company and a Japanese Battery (ff)
Manufacturer filed confidentially pursuant to Rule 24b-2
10.29 Intercompany Services Agreement dated as of September 2, 1993 (gg)
between the Company and Ovonic Battery Company, Inc.
10.30 Executive Employment Agreement dated as of September 2, 1993 (hh)
between the Company, Ovonic Battery Company, Inc. and Stanford
R. Ovshinsky
10.31 Executive Employment Agreement dated as of September 2, 1993 (ii)
between the Company and Stanford R. Ovshinsky
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.32 Stock Option Agreement by and between Ovonic Battery Company, (jj)
Inc. and Stanford R. Ovshinsky dated as of November 18, 1993
10.33 Stock Option Agreement by and between the Company and (kk)
Stanford R. Ovshinsky dated as of November 18, 1993
10.34 Stock Option Agreement by and between the Company and Iris M. (ll)
Ovshinsky dated as of November 18, 1993
10.35 Stock Purchase Agreement by and between Sanoh Industrial Co., (mm)
Ltd., the Company and Ovonic Battery dated December 31, 1993
10.36 Stakeholder Agreement between Ovonic Battery Company, Inc. and (nn)
General Motors Corporation for the organization of GM Ovonic
L.L.C. dated June 14, 1994 filed confidentially pursuant
to Rule 24b-2
10.37 Consumer Battery License Agreement effective as of December 15, (oo)
1994 by and between the Company, Ovonic Battery Company, Inc.
and Sanyo Electric Co., Ltd., filed confidentially pursuant to
Rule 24b-2
10.38 Consumer Battery License Agreement effective as of December 20, (pp)
1994 by and between the Company, Ovonic Battery Company, Inc.
and Toshiba Battery Co., Ltd., filed confidentially pursuant to
Rule 24b-2
10.39 Second Amendment to Sylva/ECD/OBC License Agreement (qq)
effective as of January 1, 1995 by and between the Company,
Ovonic Battery Company, Inc. and Sylva Industries, Ltd., portions
of which have been filed confidentially pursuant to Rule 24b-2
10.40 Consumer battery agreement effective as of January 10, 1995 by (rr)
and between the Company, Ovonic Battery Company, Inc. and a
consumer battery manufacturer, portions of which have been filed
confidentially pursuant to Rule 24b-2
10.41 Battery License Agreement dated March 28, 1995 by and between (ss)
Ovonic Battery Company, Inc. and Walsin Technology Corp., portions
of which have been filed confidentially pursuant to Rule 24b-2
10.42 Amendment to License and Joint R&D Agreement effective as of (tt)
March 31, 1995 by and between Hitachi Maxell, Ltd., the Company
and Ovonic Battery Company, Inc., portions of which have been filed
confidentially pursuant to Rule 24b-2
10.43 Energy Conversion Devices, Inc. 1995 Non-Qualified Stock (uu)
Option Plan
</TABLE>
-93-
<PAGE>
<TABLE>
<S> <C>
10.44 Memory Patent License Agreement by and between Toray (vv)
Industries, Inc. and the Company effective as of April 1, 1995
10.45 Amendment Agreement by and between Varta Batterie A.G., the (ww)
Company and Ovonic Battery effective as of June 8, 1995, portions
of which have been filed confidentially pursuant to Rule 24b-2
10.46 Amendment to License Agreement by and between Samsung Display (xx)
Devices Co., Ltd., the Company and Ovonic Battery effective as
of June 23, 1995, portions of which have been filed confidentially
pursuant to Rule 24b-2
10.47 Amendment Agreement by and between Eveready Battery Company, (yy)
Inc., the Company and Ovonic Battery effective as of June 23,
1995, portions of which have been filed confidentially pursuant
to Rule 24b-2
10.48 License Agreement effective as of September 30, 1995 by and (zz)
between Ovonic Battery Company, Inc. and Sanoh Industrial Co.,
Ltd., portions of which have been filed confidentially pursuant
to Rule 24b-2
10.49 Consumer Battery Agreement effective as of September 29, 1995 (aaa)
by and between Ovonic Battery Company, Inc. and Furukawa Battery
Co., Ltd., portions of which have been filed confidentially
pursuant to Rule 24b-2
10.50 Battery License Agreement by and between Ovonic Battery (bbb)
Company, Inc. and Asia Pacific Investment Co. dated January 4,
1996, filed confidentially pursuant to Rule 24b-2
10.51 Stock Purchase Agreement executed May 14, 1996, by and among (ccc)
Honda Motor Co., Ltd., the Company and Ovonic Battery Company,
Inc.
10.52 Settlement Agreement effective as of March 28, 1996, by and (ddd)
among the Company, Ovonic Battery Company, Inc., Saft America,
Inc. ("Saft") and certain entities affiliated with Saft, portions
of which have been filed confidentially pursuant to Rule 24b-2
10.53 Executive Employment Agreement dated as of February 19, 1998 (eee)
between the Company and Iris M. Ovshinsky
10.54 Executive Employment Agreement, Restricted Stock Agreement and (fff)
Stock Option Agreement dated as of January 15, 1999 between the
Company and Robert C. Stempel
11.1 Computation of Earnings Per Share Attributable to Common Stock 107
21.1 List of all direct and indirect subsidiaries of the Company 108
23.1 Consent of Independent Auditors 109
-94-
</TABLE>
<PAGE>
<TABLE>
<S> <C>
23.2 Consent of Independent Auditors in connection with United Solar 110
Systems Corp.
27.1 Financial Data Schedule (Edgar version) 111
28.1 Decision and Order dated May 25, 1993 (ggg)
28.2 Order dated August 18, 1993 (hhh)
99.1 United Solar Systems Corp. Consolidated Financial Statements 112
</TABLE>
Notes to Exhibit List
---------------------
(a) Filed as Exhibit 2-A to the Company's Form 8-A and incorporated herein
by reference.
(b) Filed as Exhibit 3.5 to the Company's Registration Statement on Form
S-3 (Registration No. 333-50749) and incorporated herein by reference.
(c) Filed as Exhibit 3.10 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997, as amended, and incorporated
herein by reference.
(d) Filed as Exhibit 13-D to the Company's Registration Statement on Form
S-1 (Registration No. 2-26772) and incorporated herein by reference.
(e) Filed as Exhibit 28.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1984 and incorporated herein by
reference.
(f) Filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the fiscal year June 30, 1986 and incorporated herein by
reference.
(g) Filed as Exhibit 10.46 to the Company's Annual Report on Form 10-K
for the fiscal June 30, 1986 and incorporated herein by reference.
(h) Filed as Exhibit 10.6 to the Company's Current Report on Form 8-K
dated June 13, 1986 and incorporated herein by reference.
(i) Filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1986 and incorporated herein by
reference.
(j) Filed as Exhibit 10.71 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1989, as amended, and
incorporated herein by reference.
(k) Filed as Exhibit 10.82 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and incorporated
herein by reference.
(l) Filed as Exhibit 10.83 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and incorporated
herein by reference.
-95-
<PAGE>
(m) Filed as Exhibit 10.92 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and
incorporated herein by reference.
(n) Filed as Exhibit 10.94 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and incorporated
herein by reference.
(o) Filed as Exhibit 10.96 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and incorporated
herein by reference.
(p) Filed as Exhibit 10.97 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and incorporated
herein by reference.
(q) Filed as Exhibit 10.98 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and incorporated
herein by reference.
(r) Filed as Exhibit 10.99 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990, as amended, and incorporated
herein by reference.
(s) Filed as Exhibit 28.1 to the Company's Current Report on Form 8-K
dated February 6, 1991 and incorporated herein by reference.
(t) Filed as Exhibit 28.2 to the Company's Current Report on Form 8-K
dated February 6, 1991 and incorporated herein by reference.
(u) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1991 and incorporated herein
by reference.
(v) Filed as Exhibit 10.114 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991, as amended, and incorporated
herein by reference.
(w) Filed as Exhibit 10.115 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991, as amended, and incorporated
herein by reference.
(x) Filed as Exhibit 10.116 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1991, as amended, and incorporated
herein by reference.
(y) Filed as Exhibit 10.72 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992, as amended, and
incorporated herein by reference.
(z) Filed as Exhibit 10.75 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992, as amended, and incorporated
herein by reference.
(aa) Filed as Exhibit 10.81 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992, as amended, and
incorporated herein by reference.
-96-
<PAGE>
(bb) Filed as Exhibit 10.87 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(cc) Filed as Exhibit 10.91 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(dd) Filed as Exhibit 10.92 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(ee) Filed as Exhibit 10.93 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(ff) Filed as Exhibit 10.94 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(gg) Filed as Exhibit 10.96 to the Company's Annual Report on Form 10-K\
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(hh) Filed as Exhibit 10.100 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(ii) Filed as Exhibit 10.101 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(jj) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993 and incorporated herein by
reference.
(kk) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993 and incorporated herein by
reference.
(ll) Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993 and incorporated herein by
reference.
(mm) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1993 and incorporated herein by
reference.
(nn) Filed as Exhibit 10.75 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994 and incorporated herein by
reference.
(oo) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994 and incorporated herein by
reference.
(pp) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994 and incorporated herein by
reference.
-97-
<PAGE>
(qq) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 and incorporated herein by
reference.
(rr) Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 and incorporated herein by
reference.
(ss) Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 and incorporated herein by
reference.
(tt) Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 and incorporated herein by
reference.
(uu) Filed as Exhibit 10.77 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein
by reference.
(vv) Filed as Exhibit 10.78 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein
by reference.
(ww) Filed as Exhibit 10.79 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein
by reference.
(xx) Filed as Exhibit 10.80 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein
by reference.
(yy) Filed as Exhibit 10.81 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995 and incorporated herein by
reference.
(zz) Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
(aaa) Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
(bbb) Filed as Exhibit 28.1 to the Company's Current Report on Form 8-K
dated January 4, 1996 and incorporated herein by reference.
(ccc) Filed as Exhibit 10.73 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 and incorporated herein by
reference.
(ddd) Filed as Exhibit 10.74 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 and incorporated herein by
reference.
(eee) Filed as Exhibit 10.63 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 and incorporated herein by
reference.
-98-
<PAGE>
(fff) Filed as Exhibits B, C and D, respectively, to the Company's Proxy
Notice and Statement dated February 23, 1999.
(ggg) Filed as Exhibit 28.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(hhh) Filed as Exhibit 28.4 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993 and incorporated herein by
reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
-99-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ENERGY CONVERSION DEVICES, INC.
By: /s/ Stanford R. Ovshinsky
-------------------------------------
Stanford R. Ovshinsky,
President and Chief Executive Officer
Dated: September 28, 1999 (Principal Executive Officer)
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Stanford R. Ovshinsky President, Chief Executive September 28, 1999
- ------------------------- Officer and Director ------------------
Stanford R. Ovshinsky (Principal Executive Officer)
/s/ Stephan W. Zumsteg Treasurer September 28, 1999
- ------------------------- ------------------
Stephan W. Zumsteg
/s/ Robert C. Stempel Director September 28, 1999
- ------------------------- (Chairman of the Board) ------------------
Robert C. Stempel
/s/ Nancy M. Bacon Director September 28, 1999
- ------------------------- ------------------
Nancy M. Bacon
/s/ Kenneth R. Baker Director September 28, 1999
- ------------------------- ------------------
Kenneth R. Baker
-100-
<PAGE>
/s/ Umberto Colombo Director September 28, 1999
- ------------------------- ------------------
Umberto Colombo
/s/ Hellmut Fritzsche Director September 28, 1999
- ------------------------- ------------------
Hellmut Fritzsche
/s/ Joichi Ito Director September 28, 1999
- ------------------------- ------------------
Joichi Ito
/s/ Seymour Liebman Director September 28, 1999
- ------------------------- ------------------
Seymour Liebman
/s/ Tyler Lowrey Director September 28, 1999
- ------------------------- ------------------
Tyler Lowrey
/s/ Walter J. McCarthy, Jr. Director September 28, 1999
- ------------------------- ------------------
Walter J. McCarthy, Jr.
/s/ Florence I. Metz Director September 28, 1999
- ------------------------- ------------------
Florence I. Metz
/s/ Iris M. Ovshinsky Director September 28, 1999
- ------------------------- ------------------
Iris M. Ovshinsky
/s/ Nathan J. Robfogel Director September 28, 1999
- ------------------------- ------------------
Nathan J. Robfogel
/s/Stanley K. Stynes Director September 28, 1999
- ------------------------- ------------------
Stanley K. Stynes
-101-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------
3.3 Certificate of Amendment to Certificate of
Incorporation filed March 25, 1999 extending
voting rights of the Company's Class A Common
Stock, increasing the authorized capital stock of
the Company's Common Stock to 20,930,000 shares,
and authorizing 430,000 shares of Class B Common
Stock
3.5 Amendment to Article VIII of the Bylaws effective as
of January 7, 1999
11.1 Computation of Earnings Per Share Attributable to
Common Stock
21.1 List of all direct and indirect subsidiaries of the
Company
23.1 Consent of Independent Auditors
23.2 Consent of Independent Auditors in connection with
United Solar Systems Corp.
27.1 Financial Data Schedule
99.1 United Solar Systems Corp. Consolidated Financial
Statements
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
ENERGY CONVERSION DEVICES, INC.
--------------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
--------------------------------------------------
ENERGY CONVERSION DEVICES, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
FIRST: Article FOURTH of the Restated Certificate of Incorporation of
the Corporation is hereby amended in its entirety to read as follows:
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 20,930,000 shares, of which 500,000
shares shall be Class A Common Stock of a par value of one cent ($.01) per
share, 430,000 shares shall be Class B Common Stock of a par value of one cent
($.01) per share, and 20,000,000 shares shall be Common Stock of a par value of
one cent ($.01) per share. The powers and rights, and the qualifications,
limitations and restrictions, of said classes of stock of the Corporation shall
be as follows:
SECTION 1 - Provisions Applicable to All Classes of Stock
1.1 - General. The Class A Common Stock, the Class B Common Stock and
the Common Stock shall be of equal rank and shall have the same powers and
rights (including rights upon the dissolution of the Corporation) except as
otherwise expressly provided herein.
1.2 - Dividends and Other Distributions, Subscription Rights and
Split-Ups and Combinations of Shares. Whenever dividends are declared or any
other distribution of the assets of the Corporation is made, whether in cash,
property or shares of stock of the Corporation, and whenever any distribution is
made to stockholders of rights to subscribe to additional shares of stock of the
Corporation, the holders of Class A Common Stock, the holders of the Class B
Common Stock and the holders of Common Stock shall be entitled to share equally,
share for share, in such dividends or other distributions; except that in the
case of dividends payable in shares of stock of the Corporation, or in the case
of rights to subscribe to such shares, the holders of Class A Common Stock and
the holders of Class B Common Stock shall receive their dividends in, or shall
have rights to subscribe to, shares of Common Stock. Whenever the shares of any
class are split up or combined, the shares of the other classes shall be
proportionately split up or combined.
-1-
<PAGE>
1.3 - Additional Issuances of Stock. The Corporation shall not,
except with the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock, Class A Common Stock and Class B Common Stock, each
voting separately as a class, authorize any additional shares of Class A Common
Stock, Class B Common Stock or Common Stock, except to satisfy the provisions of
Section 1.2 above.
SECTION 2 - Voting Rights
2.1 - Conversion Date. As used herein, the term "Conversion Date "
shall mean the first date as of which all outstanding shares of Class A Common
Stock have been converted into shares of Common Stock and no shares of Class A
Common Stock are issued and outstanding.
2.2 - Voting Rights. Except as herein provided, prior to the
Conversion Date, upon all matters requiring the vote of stockholders, including
the election and removal of directors with or without cause, the holders of
Class A Common Stock shall be entitled to twenty-five votes per share, and the
holders of Class B Common Stock and Common Stock shall be entitled to one vote
per share. Except as herein provided, from and after the Conversion Date, upon
all matters requiring the vote of stockholders, including the election and
removal of directors with or without cause, the holders of Class B Common Stock
shall be entitled to twenty-five votes per share, and the holders of Common
Stock shall be entitled to one vote per share. Except as otherwise provided by
law, or by this Certificate of Incorporation, the votes of the holders of Class
A Common Stock, the holders of Class B Common Stock and the holders of the
Common Stock shall be counted and totaled together without regard to class.
Prior to the Conversion Date, the holders of the Class A Common Stock, as one
class, and the holders of the Class B Common Stock and Common Stock, together as
a second class, shall be entitled to vote as two separate classes on all matters
involving or relating to the merger, consolidation, liquidation, dissolution,
sale of all, or substantially all, of the assets of the Corporation, or such
other matters as may come within the meaning of Section 242 of the Delaware
General Corporation law requiring votes by classes. From and after the
Conversion Date, the holders of Class B Common Stock, as one class, and the
holders of Common Stock, as a second class, shall be entitled to vote as two
separate classes on all matters involving or relating to the merger,
consolidation, liquidation, dissolution, sale of all, or substantially all, of
the assets of the Corporation, or such other matters as may come within the
meaning of Section 242 of the Delaware General Corporation law requiring votes
by classes.
SECTION 3 - Conversion
3.1 - Conversion into Common Stock at Option of Holders. Any holder
of shares of Class A Common Stock or Class B Common Stock may convert any or all
of such shares held by him into the same number of shares of Common Stock by
surrendering to the Corporation, or to any duly authorized transfer agent for
the Corporation, a certificate representing the shares of Class A Common Stock
or Class B Common Stock to be converted together with a written statement signed
by such holder stating that the shares are to be so converted. Any shares of
Class A Common Stock or
-2-
<PAGE>
Class B Common Stock so surrendered for conversion shall thereupon be deemed to
have been converted into an equal number of shares of Common Stock, and the
Corporation or such transfer agent shall promptly thereafter issue and deliver
to the holder of the shares surrendered for conversion a certificate or
certificates representing the shares of Common Stock issuable upon such
conversion.
3.2 - Mandatory Conversion into Common Stock. All outstanding shares
of Class A Common Stock and Class B Common Stock shall be deemed to have been
converted into an equal number of shares of Common Stock on September 30, 2005.
From and after the time of such conversion, the special rights and powers of
Class A Common Stock and Class B Common Stock shall terminate regardless of the
fact that certificates purporting to represent Class A Common Stock or Class B
Common Stock may continue to be outstanding. The Corporation shall be entitled
to demand surrender of certificates purporting to represent Class A Common Stock
or Class B Common Stock which have been converted into Common Stock under this
Section 3.2 and to withhold dividends and other distributions on the shares so
converted until the surrender of such certificates. Upon surrender of such
certificates representing shares of Class A Common Stock or Class B Common
Stock, the Corporation shall issue to the holder thereof certificates
representing an equal number of shares of Common Stock.
3.3 - Stock Converted Not to be Reissued. No share of Class A Common
Stock or Class B Common Stock converted pursuant to Section 3.1 or Section 3.2
hereof shall be reissued.
The effect of the foregoing amendment is to change the dated on which
the shares of Class A Common Stock of the Corporation are deemed to be converted
into Common Stock from September 14, 1999 to September 30, 2005 and to authorize
430,000 shares of a new Class B Common Stock. Such changes shall be automatic
and no action on the part of the holders of Class A Common Stock or Common Stock
shall be necessary to effect such changes.
SECOND: The amendment to the Restated Certificate of Incorporation
effected hereby has been proposed by the Board of Directors of the Corporation
and adopted by a majority vote of the stockholders of the Corporation in the
manner prescribed by Section 242 of the General Corporation Law of the State of
Delaware.
-3-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its Chief Executive Officer as of this 25 day of March, 1999.
ENERGY CONVERSION DEVICES, INC.
By: /s/ Stanford R. Ovshinsky
----------------------------
Its: Chief Executive Officer
AMENDMENT TO ARTICLE VIII OF THE BYLAWS
OF ENERGY CONVERSION DEVICES, INC.
The first sentence of the Fourth paragraph of Article VIII of the Bylaws
is amended as of January 7, 1999, as follows:
The total number of directors shall consist of not
less than three nor more than fourteen directors.
ENERGY CONVERSION DEVICES, INC. and SUBSIDIARY
COMPUTATION OF EARNINGS (LOSSES) PER SHARE
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
Weighted average number of shares
outstanding 13,019,657 11,116,619 10,729,802
Net loss $(13,777,589) $(16,664,999) $(17,954,612)
BASIC NET LOSS PER SHARE $ (1.06) $ (1.50) $ (1.67)
============= ============= =============
DILUTED
Weighted average number of shares
outstanding 13,019,657 11,116,619 10,729,802
Weighted average shares for dilutive
securities 0 0 0
------------ ------------ ------------
Average number of shares
Outstanding and potential
dilutive shares 13,019,657 11,116,619 10,729,802
Net loss $(13,777,589) $(16,664,999) $(17,954,612)
DILUTED NET LOSS PER SHARE $ (1.06) $ (1.50) $ (1.67)
=========== =========== ===========
</TABLE>
DIRECT AND INDIRECT SUBSIDIARIES
--------------------------------
Percentage
Subsidiary Ownership
---------------------------- ----------
Ovonic Battery Company, Inc. 91.42%
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-18962, 333-5709 and 333-50749 on Form S-3 and Registration Statement Nos.
33-91340 and 33-92918 on Form S-8 of Energy Conversion Devices, Inc., of our
report dated September 24, 1999, appearing in this Annual Report on Form 10-K of
Energy Conversion Devices, Inc. for the year ended June 30, 1999.
/s/ Deloitte & Touche LLP
Detroit, Michigan
September 24, 1999
CONSENT OF KPMG LLP
The Board of Directors
United Solar Systems Corp.
We consent to the incorporation by reference in the registration statements,
Nos. 33-91340 and 33-92918 on Form S-8, and Nos. 33-18962, 333-5709 and
333-50749 on Form S-3 of Energy Conversion Devices, Inc. of our report dated
February 19, 1999, with respect to the consolidated balance sheets of United
Solar Systems Corp. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1998,
which report appears in the Form 10-K of Energy Conversion Devices, Inc. for
the fiscal year ended June 30, 1999.
Our report dated February 19, 1999 contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has a net
capital deficiency, which raise substantial doubt about its abiltiy to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Detroit, Michigan
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the Form
10-K for the period ended June 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 19,076,983
<SECURITIES> 0
<RECEIVABLES> 7,719,925
<ALLOWANCES> (303,000)
<INVENTORY> 589,245
<CURRENT-ASSETS> 27,386,153
<PP&E> 27,388,090
<DEPRECIATION> (19,449,827)
<TOTAL-ASSETS> 39,807,998
<CURRENT-LIABILITIES> 8,947,200
<BONDS> 2,679,936
0
0
<COMMON> 134,912
<OTHER-SE> 23,053,715
<TOTAL-LIABILITY-AND-EQUITY> 39,807,998
<SALES> 4,524,238
<TOTAL-REVENUES> 32,972,296
<CGS> 8,136,000
<TOTAL-COSTS> 17,361,358
<OTHER-EXPENSES> 20,468,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 563,613
<INCOME-PRETAX> (13,777,589)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,777,589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,777,589)
<EPS-BASIC> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
Independent Auditors' Report
The Board of Directors and Stockholders
United Solar Systems Corp.:
We have audited the accompanying consolidated balance sheets of United Solar
Systems Corp. and subsidiary (the "Company") (a joint venture between Canon
Inc. and Energy Conversion Devices, Inc.) as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, except as discussed in the following paragraph, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of United Solar Systems Corp. and
subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 11 to the
financial statements, the Company has suffered recurring losses from
operations and has a significant accumulated deficit that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 11. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ KPMG LLP
Detroit, Michigan
February 19, 1999
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets
1998 1997
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash $ 335,224 716,461
equivalents (note 3)
Accounts receivable:
Trade (less allowance for doubtful accounts of 1,339,209 1,805,369
$35,000)
Stockholders (note 6) -- 36,261
Contracts (notes 6 533,057 560,929
and 9)
Inventories (note 4) 3,807,819 2,633,131
Prepaid expenses 388,705 440,467
Other current assets 3,969 34,678
----------- ----------
Total current assets 6,407,983 6,227,296
Property, plant, and equipment, net (notes 5 and 6) 10,428,243 12,595,857
Other assets 219,773 216,794
------------ ----------
$ 17,055,999 19,039,947
============ ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of capital lease obligations $ 864,469 806,749
(note 7)
Accounts payable:
Trade 1,597,777 1,485,676
Stockholders (note 6) 395,926 655,232
Accrued expenses (note 6) 868,057 639,966
Deferred revenue 35,000 35,000
------------ ---------
Total current liabilities 3,761,229 3,622,623
Capital lease obligations, less current maturities (note 7) 7,914,036 8,778,504
Note payable - stockholder (note 6) 2,500,000 --
Total liabilities 14,175,265 12,401,127
Stockholders' equity:
Common stock (note 1):
Series A, par value $0.01; authorized
3,000,000 shares; issued and outstanding
2,924,558.85 shares and 2,645,238.85 shares 29,245 26,452
in 1998 and 1997, respectively
Series B, par value $0.01; authorized
3,000,000 shares; issued and outstanding
2,924,558.85 shares and 2,645,238.85 shares 29,245 26,452
in 1998 and 1997, respectively
Series C, par value $0.01; authorized 500
shares; issued and outstanding
200 shares 2 2
------------ ---------
Total common stock 58,492 52,906
Additional paid-in capital 58,939,336 53,945,093
Accumulated deficit (56,117,094 (47,359,179)
------------ ------------
Total stockholders' equity 2,880,734 6,638,820
Commitments and contingencies (note 7)
$ 17,055,999 19,039,947
============ ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenues (notes 6 and 9) $ 10,540,830 9,661,402
Cost of sales 12,366,009 14,158,315
------------ -----------
Gross loss (1,825,179) ( 4,496,913)
------------- ------------
Research and development expenses (notes 6 and 9) 2,777,544 2,789,524
General and administrative expenses (note 6) 1,663,578 1,533,295
Sales and marketing expenses 1,460,242 1,785,465
------------ -----------
Total operating expenses 5,901,364 6,108,284
------------ -----------
Operating loss (7,726,543) (10,605,197)
Other income (expense):
Royalty income - related party (note 6) -- 11,500,000
Interest income 102,415 45,692
Interest expense (798,122) (404,557)
Loss on sale/disposal of equipment (175,876) (280,971)
Foreign exchange loss (163,117) (94,263)
Other, net 3,328 19,570
------------ ------------
Net income (loss) before tax expense (8,757,915) 180,274
Income tax expense (note 8) -- --
------------ ------------
Net income (loss) $ (8,757,915) 180,274
============= ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Common Common Additional
Stock Stock Stock paid-in Accumulated
Series A Series B Series C capital deficit Total
-------- -------- -------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 26,452 26,452 2 53,945,093 (47,539,453) 6,458,546
Net income -- -- -- -- 180,274 180,274
--------- ------- ------- ----------- ------------ ----------
Balance at December 31, 1997 26,452 26,452 2 53,945,093 (47,359,179) 6,638,820
Issuance of common stock, 279,320 shares
each of Class A and Class B 2,793 2,793 -- 4,994,243 -- 4,999,829
Net loss -- -- -- -- ( 8,757,915) (8,757,915)
--------- ------- ------- ----------- ------------ ----------
Balance at December 31, 1998 $ 29,245 29,245 2 58,939,336 (56,117,094) 2,880,734
========= ======= ======= =========== ============ ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,757,915) 180,274
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on sa;e/disposal of equipment 175,876 280,971
Depreciation 2,176,441 1,522,080
Changes in assets and liabilities:
Decrease (increase) in accounts receivable - trade 466,160 (1,267,547)
Decrease in accounts receivable - stockholders 36,261 497,908
Decrease (increase) in accounts receivable - contracts 27,872 (343,206)
(Increase) decrease in inventories (1,174,688) 415,060
Decrease (increase) in prepaid expenses 51,762 (263,967)
Decrease in other current assets 30,709 74,192
Increase in other assets (2,979) (5,239)
Increase in accounts payable - trade 112,101 372,717
(Decrease) increase in accounts payable - stockholders (259,306) 209,962
Increase in accrued expenses 228,091 99,809
------------- -----------
Net cash provided by (used in) operating activities (6,889,614) 1,773,014
------------- -----------
Cash flows used in investing activities:
Capital expenditures (211,464) (914,330)
Proceeds from sale of assets 26,760 --
------------- -----------
Net cash used in investing activities (184,704) (914,330)
------------- -----------
Cash flows from financing activities:
Proceeds from notes payable - stockholder 2,500,000 --
Payments of loans payable, net -- (1,350,000)
Principal payments under capital lease obligations (806,748) (64,747)
Issuance of common stock 4,999,829 --
------------- -----------
Net cash provided by (used in) financing activities 6,693,081 (1,414,747)
------------- -----------
Net decrease in cash and cash equivalents (381,237) (556,063)
Cash and cash equivalents at beginning of year 716,461 1,272,524
------------- -----------
Cash and cash equivalents at end of year $ 335,224 716,461
============ ===========
</TABLE>
Supplemental disclosure of noncash activities:
During the year ended December 31, 1997, approximately $304,540 of interest
cost was capitalized into construction in progress. Cash paid for interest
during the years ended December 31, 1998 and 1997 was $649,574 and $425,706,
respectively.
During 1997, the Company entered into a sale-leaseback transaction for a
production line which the Company had previously constructed and for which
the Company had net capitalized costs on its books of approximately
$10,700,000. The new capital lease in the amount of $9,650,000 is payable on
a monthly basis over a seven-year period.
See accompanying notes to consolidated financial statements.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Formation and Ownership Structure
United Solar Systems Corp. and subsidiary ("United Solar" or "Company"), a
joint venture between Canon Inc. ("Canon") and Energy Conversion Devices,
Inc. ("ECD"), was formed to produce solar panels that convert sunlight to
electric current. The Joint Venture combines ECD's technological know-
ledge of photovoltaics with Canon's manufacturing technology and
marketing "know-how" to develop and bring this technology to the market-
place. United Solar became operational in 1991.
In 1992, United Solar established a maquiladora (assembly) operation in
Tijuana, Mexico through its subsidiary, United Solar Systems de Mexico,
S.A. de C.V. ("USS de Mexico"). United Solar directly owns 99.9% of its
subsidiary. The remaining interest is held by USS de Mexico directors who
are also employees of United Solar. Under this maquiladora operation,
United Solar ships partially assembled solar cell products that are
manufactured in Troy, Michigan to USS de Mexico for final assembly,
packaging, and shipment to United Solar's ultimate customers.
In 1996, Canon and ECD each purchased 250,000 shares of Series A and Series
B common stock, respectively, for cash payments of $5,000,000 each.
In 1998, Canon and ECD purchased 279,320 shares of Series A and Series B
common stock, respectively, for cash payments totaling $4,999,829.
Canon and ECD each have an ownership interest in United Solar of 49.998%.
The remaining minority ownership interest is held by an unrelated party.
Unless and until either the Series A common stockholder or the Series B
common stockholder owns more than 50% of the stock outstanding, the Series
A and the Series B stockholders may each elect four directors and the
Series C stockholder may elect one director. In all other voting matters,
each share outstanding has an equal voting right. Canon, ECD, and the
Series C stockholder have agreed that if the Series C stockholder decides
to sell its shares, Canon may purchase the Series C common stock at the
greater of principal plus interest or appraised value.
As noted in the accompanying statement of operations, the Company incurred
significant losses in 1998. The Company may not be able to generate enough
cash to fund further deficits (see note 11).
The Joint Venture is economically dependent on its stockholders. In the
past, the stockholders have provided additional equity cash infusions,
guarantees of third-party debt, direct lending, and other similar
activities necessary to provide cash or other assets to fund the Joint
Venture's continued operating losses, capital expenditures, and utilization
of licensed technology. There can be no assurances that such support will
continue.
In order to address working capital needs, management has undertaken many
tasks, including seeking to secure additional financing, selling geographic
licenses for its technology, securing royalty fees, and entering into a
sale-leaseback transaction of certain Joint Venture assets. Management is
continuing its efforts to secure additional equity and/or other financing.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(2) Summary of Significant Accounting Policies
(a)Basis of Presentation
The accompanying consolidated financial statements for the years ended
December 31, 1998 and 1997 include the accounts of United Solar and its
majority-owned subsidiary, USS de Mexico, after elimination of
intercompany accounts and transactions.
(b)Cash Equivalents
Cash equivalents are temporary investments with an original maturity of
less than three months. Substantially all cash and cash equivalents are
interest bearing.
(c)Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using standard costs, which approximate the first-in,
first-out (FIFO) method. Market is calculated using an average value of
recent sales to unrelated entities.
(d)Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation on
machinery and equipment, furniture and fixtures, and vehicles is
calculated using accelerated methods over the estimated useful lives of
the assets, which are five to six years. Amortization of tooling is
calculated using the straight-line method over two years. Leasehold
improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the asset.
Included in property, plant, and equipment are capitalized assets which
were sold to a third party (see note 7) and leased back under a
sale-leaseback transaction entered into in 1997.
Expenditures for machinery and other equipment acquired for a particular
research and development project and which have no alternative future
use (in other research and development projects or otherwise) are
charged to product development and research costs as incurred. Machinery
and other equipment which have alternative future uses are capitalized
at cost.
Expenditures for maintenance and repairs are charged to operations.
Expenditures for betterments or major renewals are capitalized and are
depreciated over their estimated useful lives.
(e)Research and Development
Research and product development costs are expensed as incurred.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(f)Royalties
Royalty expenses are accrued when the sales generating the royalty are
recorded. United Solar is responsible for royalties on future sales of
photovoltaic products for a 13-year period which expires in fiscal year
2003. The Joint Venture pays royalties at a rate of 3% of the first $25
million of annual net sales of certain photovoltaic products, 2% of the
next $100 million of annual net sales, and 1% of the annual net sales
above $125 million. Royalty expense was approximately $273,000 and
$147,000 for the years ended December 31, 1998 and 1997, respectively.
The Joint Venture Agreement also provides for a cross-license related to
"know-how" among Canon, ECD, and United Solar. In addition, ECD, United
Solar, and Canon have agreed to an option to obtain certain nonexclusive
licenses related to photovoltaic technology developed after December 31,
1992.
(g)Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(h)Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. Management
believes the estimates used are reasonable.
(3) Cash and Cash Equivalents
Cash and cash equivalents were comprised of the following at December 31,
1998 and 1997:
1998 1997
------- -------
Cash (checks issued in excess of available $ 4,620 (19,914)
funds)
Dreyfus Money Market Fund 330,604 736,375
------- -------
$ 335,224 716,461
========= =======
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(4) Inventories
Inventories at December 31, 1998 and 1997 consist of the
following:
1998 1997
--------- --------
Raw materials $ 1,903,123 1,777,867
Work in process 1,156,596 1,224,430
Finished goods 1,758,100 315,834
------------ ---------
4,817,819 3,318,131
Lower of cost or market valuation (1,010,000) (685,000)
provision
------------ ----------
Total $ 3,807,819 2,633,131
============ =========
(5) Property, Plant, and Equipment
Property, plant, and equipment at December 31, 1998 and 1997 consist of the
following:
1998 1997
--------- ---------
Machinery and equipment $ 5,270,818 5,225,522
Furniture and fixtures 548,032 552,389
Leasehold improvements 1,480,354 1,562,795
Tooling 433,092 433,092
Vehicles 49,802 40,104
Capitalized leased equipment 9,650,000 9,650,000
------------ ---------
17,432,098 17,463,902
Less accumulated depreciation and (7,003,855) (4,960,645)
amortization
Construction in progres -- 92,600
------------ ----------
Property, plant, and equipment, $ 10,428,243 12,595,857
net
============ ==========
(6) Related Party Transactions
United Solar incurred $159,401 and $193,038 in various administrative,
equipment, and facility construction costs from ECD in 1998 and 1997,
respectively. United Solar purchased $29,382 and $1,998,126 of various
equipment and materials from Canon and subsidiaries in 1998 and 1997,
respectively. Canon and subsidiaries provided various management services
to United Solar at no charge during the years ended December 31, 1998 and
1997 (see also notes 7 and 8).
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
During 1997, the Company received $11,500,000 from the sale of certain
manufacturing and licensing rights for certain European and Australian
markets to Canon Inc. The amount is included as royalty income - related
party in the accompanying 1997 statement of operations.
United Solar made product sales to Canon and subsidiaries of $261,087 and
$615,422 in 1998 and 1997, respectively. Revenues from ECD totaled $20,153
and $30,310 in 1998 and 1997, respectively.
United Solar was awarded a cost-sharing research contract with ECD which
began June 1, 1994. The contract ran through May 31, 1997, and was being
funded 47.6% by National Renewable Energy Laboratory ("NREL") and 52.4% by
United Solar. The amount of funding recorded as revenue under this contract
in 1997 was $84,179.
The accounts receivable from stockholders represent amounts due from Canon
and subsidiaries of $0 and $22,185 at December 31, 1998 and 1997,
respectively, and $0 and $14,076 due from ECD at December 31, 1998 and
1997, respectively. The accounts payable to stockholders represent amounts
payable to ECD of $395,926 and $310,005 at December 31, 1998 and 1997,
respectively, and to Canon of $0 and $345,227 at December 31, 1998 and
1997, respectively.
Note payable at December 31, 1998 consisted of a term loan from Canon in
the amount of $2,500,000. Interest is calculated at the rate of 6.21% per
annum, and the loan plus accrued interest is payable in full at January 17,
2003. Total interest accrued at December 31, 1998 was $148,965.
(7) Leases
United Solar has noncancelable operating leases for its corporate facility
in Troy, Michigan, a warehouse facility in San Diego, California, and its
maquiladora operation in Tijuana, Mexico. Rent expense for the years ended
December 31, 1998 and 1997 was $849,605 and $873,684, respectively.
At December 31, 1998, future minimum lease payments under noncancelable
operating leases are as follows:
1999 $ 710,129
2000 333,569
2001 306,804
2002 306,804
2003 and thereafter 953,542
=========
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company is also obligated under a capital lease for certain machinery
and equipment. Under the terms of the agreement, United Solar will make 43
monthly payments of $120,475 from the period November 21, 1997 to June 21,
2001, and 42 monthly payments of $174,733 from the period July 21, 2001
until the lease termination date of December 21, 2004, at which time United
Solar can repurchase the assets for the nominal value of $1.00. The lease
is guaranteed by Canon, and as a result, Canon has a lien on United Solar's
assets. Future minimum capital lease payments as of December 31, 1998 are:
Year ending December 31:
1999 $ 1,445,703
2000 1,445,703
2001 1,771,249
2002 2,096,795
2003 2,096,795
2004 2,096,795
---------
Total minimum lease payments 10,953,040
Less amount representing interest at 2,174,535
6.93%
-----------
Present value of net minimum
capital lease payments 8,778,505
Less current maturities of capital lease 864,469
obligations
-----------
Capital lease obligations,
less current maturities $ 7,914,036
============
The Company subleases its warehouse space in San Diego,
California to a third party. The operating lease expires
April 30, 2000 and requires monthly payments of $6,025. Lease
revenue recorded in 1998 was $12,050.
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(8) Income Taxes
At December 31, 1998, United Solar had available net operating loss (NOL)
carryforwards for federal income tax purposes of approximately $59,700,000.
The carryforwards expire as follows:
Fiscal year:
2005 $ 2,900,000
2006 5,300,000
2007 7,600,000
2008 7,700,000
2009 7,500,000
2010 7,600,000
2011 9,300,000
2012 1,400,000
2018 10,400,000
-----------
$ 59,700,000
============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1998 and 1997 are presented
below.
1998 1997
---------- ----------
Deferred tax assets:
Accounts receivable allowance $ 14,000 14,000
Inventory reserve 343,000 275,000
Warranty accrual 68,000 40,000
Intangibles 1,490,000 2,245,000
NOL carryforwards 20,340,000 19,416,000
Other 81,000 --
----------- -----------
Total gross deferred tax assets 22,336,000 21,990,000
----------- -----------
Deferred tax liabilities:
Excess tax over book depreciation 426,000 360,000
----------- -----------
Total gross deferred tax liabilities 426,000 360,000
----------- -----------
Net deferred tax assets 21,910,000 21,630,000
Less valuation allowance (21,910,000) (21,630,000)
------------- -------------
Net deferred tax assets $ -- --
============= =============
<PAGE>
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The net changes in the total valuation allowance for the years ended
December 31, 1998 and 1997 were an increase of $280,000 and $207,000,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of historical losses and projections for future taxable
income over the periods during which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
not realize the benefits of these deferred tax assets.
(9) Research Contracts
United Solar was awarded a follow-on cost-sharing contract with NREL in
August 1994. The final phase ended February 28, 1998. The total amount of
the contract is $3,106,578, which was funded 47.6% by NREL and 52.4% by
United Solar. Amounts billed to NREL and recognized as revenues under the
contract in 1998 and 1997 were $110,488 and $417,132, respectively.
Included in accounts receivable - contracts at December 31, 1998 and 1997
is $14,769 and $71,302, respectively, related to this contract.
Similarly, United Solar was awarded a separate cost-sharing contract with
NREL in February 1995. The last phase ran through February 1, 1998. The
total amount of the three-year contract was $3,985,786, which was funded
50% by NREL and 50% by United Solar. Amounts billed to NREL and recognized
as revenue under this contract in 1998 and 1997 were $163,210 and $712,512,
respectively. Included in accounts receivable - contracts at December 31,
1998 and 1997 is $51,230 and $242,846, respectively, related to this
contract.
United Solar was awarded a follow-on cost-sharing contract with NREL in
March 1998. Phase I runs through September 30, 1999 and is currently in
progress. The total amount of the 38-month contract is $5,560,000, which is
being funded 50% by NREL and 50% by United Solar. Amounts billed to NREL
and recognized as revenues under contract in 1998 were $902,559. Included
in accounts receivable - contracts at December 31, 1998 is $297,667 related
to this contract.
In addition, United Solar is working with the United States Department of
Energy ("DOE") on two separate contracts, one as the prime contractor and
one as a subcontractor. Amounts billed to DOE and recognized as revenues
under the contracts in 1998 and 1997 were $481,501 and $15,133,
respectively. Included in accounts receivable - contracts at December 31,
1998 and 1997 is $161,990 and $15,133, respectively.
As described in note 6, United Solar was engaged in a cost-sharing contract
with ECD in 1997.
<PAGE>
16
UNITED SOLAR SYSTEMS CORP.
AND SUBSIDIARY
(A Joint Venture Between Canon Inc. and
Energy Conversion Devices, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(10) Defined Contribution Pension Plan
United Solar has established a 401(k) pension plan for all full-time
employees. The plan allows eligible participants to contribute up to 15% of
their gross wages. United Solar provides a matching contribution of 50% of
employee contributions, limited to 4% of gross wages. United Solar's
expense under the plan for 1998 and 1997 was $57,897 and $54,354,
respectively.
(11) Liquidity and Going Concern
As noted in the accompanying financial statements, the Company has suffered
recurring losses from operations. Further, the Company has a significant
accumulated deficit and continues to sell its products at a gross loss. The
Company has previously obtained capital investment and debt funding from
its stockholders. Additionally, the Company has relied on the stockholder
guarantees for debt and lease financing. Based on management's projections,
there is a need for a substantial infusion of cash in order to maintain
operations while the Company strives to reach profitability. Management has
undertaken fund-raising efforts in order to obtain sufficient operating
capital for its operations as well as continued to refine its manufacturing
processes in order to obtain a gross profit on sales of its products.
As a result, there is substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
-4-
